Though some signs point to Japan falling into recession, Stanford economist Takeo Hoshi disagrees and says it is premature to judge the effectiveness of Japan's new approach to its economy. Not enough time has passed for the reforms to produce results.

Despite a recent slowdown, time will tell if Japan has charted the right economic course after more than 15 years of deflation, says a Stanford economist.

The Stanford News Service recently interviewed economics professor Takeo Hoshi of Stanford's Walter H. Shorenstein Asia-Pacific Research Center about Japan's economy – the third largest in the world.

In the last two years, Japan undertook a new economic direction in adopting fiscal reforms known as "Abenomics," which refers to its principal advocate, Japanese Prime Minister Shinzō Abe. Abenomics consists of monetary policy, fiscal policy and economic growth strategies to encourage private investment. But new data suggest that Japan may have fallen into a recession, which adds to worries about the slowing global economy.

Is Japanese Prime Minister Shinzo Abe’s "Abenomics" working?

It is too early to tell. Abenomics is not failing – yet. It has three pillars or "arrows," as they are often called. The first arrow – monetary expansion – has succeeded. Japan is out of deflation, which had lasted more than 15 years. The inflation rate has not reached the target rate of 2 percent and is recently falling a little bit, but it is away from zero. The postponement of the consumption tax increase that was announced last week was a step back on the efforts to reduce the budget deficits, which is considered to be a part of the second arrow (flexible fiscal policy). However, some people in the government have started to argue that fiscal consolidation has never been a part of the second arrow. 

According to Abe, the government will implement a consumption tax rate hike in April 2017 – it will rise from 8 percent to 10 percent. This time, the law will not include an escape clause, which made the earlier one contingent on economic conditions. It was also announced that the government will develop a real plan to achieve a fiscal surplus by a certain date. These efforts may lead to a credible plan to reach fiscal sustainability. So, it is too early to say if this second arrow of Abenomics has failed.

The third arrow is the growth strategy. The original strategy announced in June 2013 lacked focus, but the revised version enacted in June 2014 offers 10 focus areas, some of which are quite sensible. The government has just begun on some of these economic reforms. It is way too early to tell if these efforts to restore growth in Japan will prove fruitful.

Will the Japanese recession have painful implications for the United States?

I would not say Japan is in recession now. Many people say that Japan is in recession because the first preliminary estimate of the third quarter real GDP growth came out negative. With the negative growth in the second quarter, Japan's economic condition satisfies a standard definition of recession (two consecutive quarters of negative growth). But the negative growth in the second quarter was inevitable because the demand was shifted from the second quarter to the first quarter in anticipation of the consumption tax hike on April 1. People shifted the timing of durable consumption goods purchase from the second quarter to the first quarter. So, the "true" negative growth has been observed only for a quarter. 

Even the negative growth in the third quarter may not really signal a serious trouble. First, the negative growth disappears if we exclude the change in inventory. In other words, the production was down from the second quarter but the demand – or sales – did not fall. Also, many people expect the second preliminary estimate for third quarter growth that will be published on Dec. 8 will be revised higher. 

Will this hurt the global economy?

If Japan was in recession, that would hurt the rest of the world, especially when the economies in Europe are weak and China is slowing down. But I don't think Japan is in recession – yet.

What would have been a better strategy than "Abenomics?"

Abenomics has been better than any other alternatives that have been tried in Japan. The Bank of Japan finally stopped its deflationary policy. Abenomics also showed some early promise in economic reforms, which were tried before only in piecemeal ways.

Assuming the Liberal Democratic Party retains power and Prime Minister Abe returns as the prime minister after the next election – which seems to be a safe assumption – the government will continue Abenomics with a renewed commitment to fiscal reform and growth, I hope.

What is the lesson for countries around the world?

Many people have prematurely declared the "failure" of Abenomics. I don't think their assessment is correct, but the government could have done better by implementing some easier economic reforms in the beginning – and calling attention to its early successes. This could have included, for example, reducing the barriers to start new businesses.

Clifton Parker is a writer for the Stanford News Service.

The city of Cupertino, California, is only about 15km from Stanford University, where I teach and live. It is home to the headquarters of Apple, a global leader in the computer and smartphone industries. It is also home to many Indian and Chinese engineers who are essential to Silicon Valley's technological innovation. One can easily find a variety of Asian restaurants and shops along the palm tree-lined streets -- an interesting Californian scene with a distinctly Asian flavor.

Many Asians -- businesspeople, officials and experts -- visit Silicon Valley hoping to unlock its secrets, to learn why it is such a hotbed of innovation. One known "secret" here, often overlooked by Asian visitors, is the importance of cultural diversity. More than half of the area's startups, including Intel, Yahoo, eBay and Google, were established by immigrants, and these companies owe much of their success to the contributions of Chinese and Indian engineers. Cultural diversity can be found throughout the schools, stores and streets, as well as the enterprises, there.

In Israel, too

The circumstances are quite similar in Israel, another economy known for technological innovation. Following the collapse of the Soviet Union in the early 1990s, Israel admitted about 850,000 immigrants. More than 40 percent of the new arrivals were college professors, scientists and engineers, many of whom had abundant experience in research and development. These people played a critical role in promoting economic development and scientific and technological innovation in Israel. Many languages besides Hebrew can be heard on the streets of Tel Aviv, one of the country's largest cities.

It is no accident that Silicon Valley and Israel have become global high-tech centers. They opened their doors to a wide range of talented immigrants. Above all, an atypical sociocultural ecosystem -- a culture that respects and promotes the value of diversity -- is alive in both places.

In the United States, diversity is a key criterion in college admissions and faculty recruitment. Although "affirmative action" has disappeared in many parts of the country, diversity has come to play a key role in American university policies. Most American colleges, including Stanford, have a "diversity office" to promote diversity among students, faculty and staff. At Stanford, white students constitute less than 40 percent of the student body, and almost a quarter of the faculty come from minority groups. Similarly, only five of the 16 staff members at our Shorenstein Asia-Pacific Research Center are Caucasian, with the rest from ethnic and national minorities.

 The same can be said of leading American corporations, many of which have institutionalized "diversity management" to capitalize on the range of individual differences and talents to increase organizational effectiveness. Of course, basic knowledge and skills are prerequisites. But Americans seem to firmly believe that having a variety of backgrounds and experiences can help hatch new ideas and innovative technologies. Perhaps this is why they say that culture accounts for 90 percent of the innovation in products from Silicon Valley, with technology claiming only 10 percent.

The power of diversity

Scott E. Page, professor of complex systems, political science and economics at the University of Michigan, shows in his book "The Difference" how "the power of diversity creates better groups, firms, schools, and societies." In his view, collections of people with diverse perspectives and heuristics outperform collections of people who rely on homogeneous ones, and the key to optimizing efficiency in a group is diversity. In this work, Page pays particular attention to the importance of "identity diversity," that is, differences in race, ethnicity, gender, social status and the like.

To be sure, Asian countries such as Japan and South Korea are different from settler societies such as the U.S. With the influx of foreigners, however, even such ethnically homogeneous Asian societies are becoming multiethnic. In addition to unskilled labor and foreign brides, the number of overseas students and professors is rising at Japanese and South Korean universities, while Japanese and South Korean companies are actively hiring foreign professionals. Both countries are opening their doors to foreigners, though in limited numbers, and have made multiculturalism a key policy objective.

Still, they fall far short of recognizing the value of diversity. While Japanese and South Korean institutes of higher learning have been trying to attract more foreign students, they have been doing so mainly to make up for the declining student population at home and because university ranking agencies use the ratio of foreign students and professors as a key yardstick for measuring internationalization. The approaches of these two countries to multiculturalism are also largely focused on assimilating foreigners into their own cultures and systems. People from abroad are seldom accepted as "permanent" members of their societies or regarded as valuable assets. Japan and South Korea may have become multiethnic, but they are not multicultural.

One of the biggest challenges facing foreign residents in Japan and South Korea is the lack of understanding of their religious and cultural beliefs. Indian engineers working in South Korea complain of the poor acceptance of Indians by the local population, and of an especially poor understanding of their religion and culture. Foreign professors teaching at Japanese universities tell me they live as "foreigners," never accepted into the "inner" circles. It is unlikely that these talented people would like to work long term for universities and enterprises that are unable to embrace differences in skin color and culture. Under these circumstances, even if some foreign professionals happen to be hired, they may not be able to realize the full potential of their abilities, let alone bring about innovation.

All these people with different ethnic and national backgrounds should no longer be regarded simply as "temporary" residents to fill particular needs. Rather, by promoting the cultural diversity of Japanese and South Korean society, they should be viewed as important assets and potential sources of innovation. It is an urgent but difficult task to institutionalize the value of diversity in societies long accustomed to the notion of a single-race nation.

Born on campuses

A country's global competitiveness can hardly be improved if its society is reluctant to respect differences and understand other groups. Universities, in particular, should help their students experience diversity through the regular curriculum and extracurricular activities. Foreign students can serve as excellent resources for promoting diversity. Universities are ideal settings for various groups of students to meet, generate new ideas and interact with one another. It is no accident that many of the innovative ideas associated with Microsoft, Yahoo, Google and Facebook were all born on American university campuses, where diversity is embraced.

Empirical research should be carried out to examine how cultural diversity can bring about technological innovation in Japanese and South Korean society. Based on such studies, governments and private enterprises should take into account diversity in personnel hiring, training, management and evaluation. These same institutions should also systematically work to create and support an organizational culture that values diversity.

Could those Indian and Chinese engineers working in Silicon Valley have brought about the same kind of technological innovation if they had remained in their own countries? Could they accomplish the same feat in Japan and South Korea? How can Asian countries create the kind of ecosystem necessary for promoting a flexible culture of accommodating a broad spectrum of talents? We first need to reflect deeply on these questions before trying to emulate the success of Silicon Valley.

Shin recently coauthored the paper, "Embracing Diversity in Higher Education: Comparing Discourses in the U.S., Europe, and Asia" with Yonsei University Professor Rennie J. Moon. It is one outcome of their research project, Diversity and Tolerance in Korea and Asia. This Nikkei Asian Review article was originally carried on Nov. 20 and reposted with permission.

Ronald I. McKinnon, a renowned scholar of international economics, has died. A primary focus of McKinnon’s work was on East Asia, including the currency crisis of 1997-98 and Japan’s liquidity trap. The Walter H. Shorenstein Asia-Pacific Research Center remembers him with gratitude for his collaboration on research activities and participation in many public seminars. An article written by the Stanford News Service recognizes his contributions to the Stanford community and beyond.

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McKinnon was born in Edmonton, Canada, on July 10, 1935. He joined the Stanford economics faculty in 1961 as an assistant professor. He received tenure in 1966, was promoted to full professor in 1969 and eventually became a chaired professor. He earned his bachelor's degree in economics from the University of Alberta in 1956 and his doctorate in economics from the University of Minnesota in 1961.

McKinnon was an applied economist whose primary interests were international economics and economic development. Understanding financial institutions and monetary institutions was central to his teaching and research. A prolific writer, he wrote or co-authored nine books and penned numerous articles and commentary pieces for economic journals and publications such as The Economist, the Financial Times and the Wall Street Journal.

'Intellectual giant'

"SIEPR and the entire Stanford economics community lost a dear friend and an intellectual giant. We were lucky to have shared him for 53 years," said John Shoven, the director of the Stanford Institute for Economic Policy Research.

Shoven said McKinnon combined wit and wisdom. "He was both an intellectual powerhouse and a fun-loving colleague with a twinkle in his eye while he told a joke or two, or argued for his favorite unconventional theory."

McKinnon's wife, Margaret, said that her husband had a "second wind" of academic inquisitiveness that made his retirement years very active. "He did a lot of work on Asia and China, and was engaged with a whole new generation of economists and organizations."

She added that McKinnon loved economics. "He was a family man, but if something came up in economics, we knew where he would turn. His granddaughters remember him for his devotion to them and for his infectious passion for his work."

Financial repression

Along with his Stanford colleague the late Edward S. Shaw, McKinnon was among the first scholars to investigate "financial repression" as a substantial barrier to successful economic development. Financial repression refers to policies that force savers to accept returns below the rate of inflation and that enable banks to provide cheap loans to companies and governments to reduce the burden of their debt repayments.

His first book, published in 1973, Money and Capital in Economic Development, analyzed why the prevailing economic doctrines of the time had become too tolerant of inflation and of state interventions in the credit mechanism. McKinnon noted that without proper constraints, politicians were only too tempted to direct the flow of credit to suit their own ends.

He suggested strategies to escape financial repression in his 1993 book, The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy. In it, he outlined how to liberalize government policies in domestic finance and foreign trade as a way to create more open markets.

McKinnon's other major area of interest was the study of international money and finance. He probed how the use of national currencies allows international trade to be effectively monetized and multilateral rather than bartered and bilateral.

Those rules of the game, McKinnon noted, can only be understood by considering the historical perspective – from the late 19th-century gold standard, the Bretton Woods Agreement of 1945 and the postwar dollar standard.

In Money in International Exchange: The Convertible Currency System (1979), McKinnon analyzed why and how the dollar came to be used as an international vehicle and reserve currency among banks and the primary currency of invoice in international commodity trade.

In his 1996 book, The Rules of the Game: International Money and Exchange Rates, McKinnon discoursed on macroeconomics and how the dollar standard could have been modified to make the world economy more stable in the postwar era.

East Asia, China and students

In his later years, McKinnon focused on East Asia and the great currency crisis of 1997-98 in that region, as well as Japan's liquidity trap. With Kenichi Ohno, McKinnon wrote Dollar and Yen: Resolving Economic Conflict between the United States and Japan (1997).

"His work had a following all over the world," said Shoven. "This was brought home to me in 1979 when I was visiting the London School of Economics and Ron McKinnon came to give a seminar. The faculty and students were so anxious to hear Ron that the seminar room was standing room only."

McKinnon was deeply engaged with his students – both graduate and undergraduate – many of who went on to write doctoral dissertations or senior undergraduate honors theses under his mentorship.

Throughout his career, McKinnon traveled internationally to conferences and for consulting with central banks and monetary authorities in Asia, Latin America, North America and Europe. He worked with international agencies such as the International Monetary Fund, the World Bank and the Asian Development Bank, among others.

He is survived by his wife, Margaret Learmonth McKinnon, and three children – Neil Charles McKinnon of San Francisco; Mary Elizabeth McKinnon Villeneuve of Redlands, California; and David Bruce McKinnon, of Ottawa, Canada; and seven grandchildren. Plans for a memorial service have not yet been announced.

Clifton Parker is a writer for the Stanford News Service.

On Sept. 3, Japanese Prime Minister Shinzo Abe reshuffled his cabinet, bringing more than double the number of female ministers on board, in line with his pledge to revive the economy based in part on increased participation of women in business and politics.

Traditionally, Japan has provided tax and pension incentives for women to stay at home or work part-time; however, Mr. Abe seeks to change this and has laid out a plan in the “third arrow” of his administration’s economic policy.

Takeo Hoshi, an economist and director of the Japan Program at the Shorenstein Asia-Pacific Research Center, spoke with Deutsche Welle about the administration’s leadership shift and policy goals.

“Relying on women to work more is an excellent idea because the Japanese economy has underutilized women’s talents in the past,” he says.

The full article is available on Deutsche Welle online.