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.

In conversation with Shorenstein APARC, Yong Lee, the SK Center Fellow, discusses his initial draw to architecture and urbanism, and the nexus of public policy and economics. Lee highlights some of his recent research activities focused on international sanctions on North Korea and educational policy as it relates to migration and housing patterns in South Korea. 

Your background is quite multifaceted, including years working in architecture and a master’s of public policy in addition to a doctorate in economics. How do all of these areas fit together to inform your research?

It took a while for me to figure out what I wanted to pursue as a career. As a high school student in Korea I had to choose a track that focused on either the physical sciences or the humanities/social sciences. At that age, it’s hard to know what you want to be. Simply because my father was an engineer, I chose the physical sciences track. When it was time to apply for college (one actually had to determine a major when applying for college back then), I became interested in international relations and wanted to become a diplomat. But given my training in the hard sciences and the fact that one had to choose a major when applying, I had to decide on a science or engineering major. After browsing through the library a few architecture books caught my eye, and I opted for architectural engineering as my major. 

I truly enjoyed my six years of architectural training but after working for an architectural firm for several years in Seoul, I realized I was more interested in the abstract ideas of architecture and urbanism and less of the actual design process that goes on in an architectural firm. I searched for my next career, became interested in urban and development policy, and pursued a master’s of public policy at Duke University. However, then I realized that economics would allow me to rigorously analyze the policy questions I was interested in. Fortunately, Brown University accepted me as a Ph.D. student and I eventually became an economist. It was through this search process, that I developed an interdisciplinary interest in policy relevant questions. My personal choices constrained by education policy, comparatively experiencing Korea’s transition while living between Korea and the United States each decade since the 1980s, and my interest in architecture and cities have shaped my research interest in economic development and growth with a focus on education, firms and cities.  And now being at FSI, I can immerse myself in international studies, something I had wanted to pursue all along. By joining Stanford, I think I finally discovered what I had wanted to do.

One of your research streams looks at the effects of sanctions on domestic populations, looking at the case study of North Korea. How did you derive data about the closed-off regime? What are your key findings?

Research on North Korea is challenging because of the dearth of data. I had been interested in how sanctions impact the domestic population, but to examine this question one would need regional level data within in North Korea. I decided to use the satellite night-lights data, which in recent years has been used as an alternative means to measure economic activity. I found that sanctions actually increase urban-rural inequality. An additional sanctions index increases the urban-rural luminosity gap by about 1 percent. However, if I focus on the more central urban areas the gap increases to about 2.6 percent. Since urban areas are more than ten times brighter than rural areas, the results imply that the gap further increases by 1 to 2.6 percent with additional sanctions.  Furthermore, I find that the urban areas actually get brighter while the rural areas get darker.

Another of your research focuses on the impact of 1970s education policy in South Korea on intergenerational mobility and migration. Can you explain this phenomenon? Does the case of South Korea relate to reform experiences in other countries?

Students in South Korea traditionally had to take an entrance exam to enter high schools. After the exam, high schools would choose students based on the exam scores. Given the variation in school quality, a hierarchy of high schools had existed and students who performed well would enter the top tier high schools. This system was heavily criticized since wealthier families could tutor children to prepare for the entrance exam. Eventually in the mid-1970s, the South Korean government abolished the exam-based system and moved to a school district based system where students would attend high schools based on residential location. By moving away from an exam system to a district system, policymakers hoped that educational opportunities would alleviate the persistence of inequality. However, what I find is that, to the contrary, the district system generated substantial sorting of households by income. Now wealthier households could simply move to districts and cities with the prestigious high schools. Given that the purchase of housing is purely determined by income, school quality became even more segregated by income and actually exacerbated the persistence of inequality across generations. This transition is now happening in several Chinese cities and in the United States – the sorting across school districts by educational outcome has created highly segregated towns. The Korea experiment allowed me to examine not just an equilibrium outcome, but also the transition when the policy changed.

In the coming year, you’ll be teaching courses related to the economies of East Asia. Can you provide an outlook on this?

I’ll be teaching an International Policy Studies course titled, “Economic Growth, Development, and Challenges of East Asia,” in the spring. The course will focus on China, Japan, and Korea, but also draw on Southeast Asian countries, when relevant. I will cover the rapid economic growth in recent decades and development policies pursued. However, I will also cover the current major economic challenges these countries face, some of which are rising income inequality, entrepreneurship, and an aging workforce. I hope to add to our rich set of courses by providing an economics and empirical viewpoint.

Tell us something we don’t know about you.

I sometimes split my sleep. That is, I go to bed to sleep for a few hours and then wake up in the middle of the dark, do some reading or work, and then sleep for one or two hours before I start my morning routine. It started during my high school years and it has stuck with me for quite a while now. Don’t worry, though. I sleep fine most of the time. I just sometimes enjoy the dead of the night.

Asia-Pacific leaders recently met in Beijing at the annual APEC summit, and after two days of discussion, concluded with some significant pledges and remarkable moments. President Xi Jinping of China and Prime Minister Shinzo Abe of Japan held a landmark meeting, and the United States and China discussed two agreements that are both symbolic, and lay groundwork for regional progress, say Stanford scholars.

High-level intergovernmental meetings are often more theatre than substance, but this year the 21-member Asia-Pacific Economic Cooperation, the oldest trans-Pacific regional organization, delivered important messages and may spur actions by member governments.

“Any summit is a ‘hurry up, get this done’ motivator,” says Thomas Fingar, the Oksenberg-Rohlen Distinguished Fellow at the Freeman Spogli Institute for International Studies. “The head of state goes to the meeting – and generally speaking – he doesn’t want to arrive and say ‘my guys were asleep for the last year.’”

Fingar says the APEC summit prodded countries to work on “deliverables,” particularly the goals and projects on the agenda from previous meetings. He recently returned from Beijing, and shared his perspectives with students in the Asia-Pacific Scholars Program.

Writing for the East Asia Forum, Donald Emmerson, director of the Southeast Asia Program at the Walter H. Shorenstein Asia-Pacific Research Center, said many of the commitments declared at the APEC summit, and at the subsequent meetings of the G20 in Australia and the Association of Southeast Asian Nations in Myanmar, will have implications for global governance, particularly as China holds a more influential role in the region.

APEC countries account for over 40 percent of the world’s population and nearly half of global trade – and true to form, the grand vision of the summit is to advance regional economic integration.

Yet, “the ancillary things – things that went on in the margins – are in many ways more important,” Fingar says, referring to areas outside of the summit’s obvious focus, and what’s discussed on the sidelines of the public talks.

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Key outcomes from the 2014 gathering include:

• The leaders of Japan and China met for the first time since coming into office, afterward acknowledging that the two countries have “disagreements” in their official statements. Of the Xi-Abe meeting, Fingar says, “it helps clear the way for lower level bureaucrats to go to work on real issues."

• The United States and China announced a proposal to extend visas for students and businesspeople on both sides. While the immediate effects would be helpful, the change is symbolically superior. “You don’t give 5-10 year visas to adversaries,” he says, it shows that “‘we’re in [the relationship] for the long-term.’”

• China proposed the development of a new “Silk Road,” pledging $40 billion in resources toward infrastructure projects shared with South and Central Asian neighbors. “It’s tying the region together and creating economy-of-scale possibilities for other countries,” he says. “A real win-win situation.”

• The United States and China, the world’s two largest energy consumers, announced bilateral plans to cut carbon emissions over the next two decades. “It’s significant because those two countries must be the ones to lead the world in this area. Unless we are seen to be in basic agreement, others will hold back.”

• China codified the Asian Infrastructure Investment Bank (AIIB), a global financial institution intended as an alternative to institutions like the World Bank. “China has been frustrated with its role in existing international institutions,” Fingar says, explaining a likely motivation behind the AIIB’s creation.

Emmerson said the outcomes of the APEC summit from the U.S.-China standpoint were better than expected, speaking to McClatchy News. The visa and climate deals, as well as their commitment to lowering global tariffs on IT products, will lessen chances of conflict between the two countries. 

However, the summit did leave some areas unsolved. One of the most important is the Trans-Pacific Partnership (TPP), a trade pact proposed by the United States that includes 11 others countries in the region, but does not yet include China.

Leaders “made positive noises” coming out of the TPP discussions, Fingar says, but nothing was passed. The gravity and complexity of trade-related issues, especially agriculture and intellectual property, is likely to blame for slow action.

On 10 Nov. 2014 a summit of the Asia-Pacific Economic Cooperation (APEC) forum will convene in Beijing, followed in rapid succession by the East Asia Summit in Naypyidaw and the G20 in Brisbane.

Much of what will be said and done at these events will implicate the tectonics of nascent global governance set in motion by China’s campaign for greater influence in Asia.

At the APEC summit, Chinese president Xi Jinping will stress the need for massive spending on infrastructure in Asia. He will tout China’s sponsorship of a Beijing-based Asian Infrastructure Investment Bank (AIIB) that would operate outside of, and potentially compete with, the American-led World Bank and the Japanese-led Asian Development Bank (ABD).

Many will welcome the AIIB as evidence of China’s willingness to assume responsibility for public goods in a rebalanced post-Cold War world whose needs exceed the resources of existing global institutions. But will ‘public’ goods benefit the public if their terms are not made public? In 2014 China ranked 68th of 68 donors in the Aid Transparency Index compared with the 5th-place ADB and the 7th-place World Bank. Given the commercial importance of cyberspace, it is also concerning that China is the worst violator of the rights of internet users in the latest Freedom House ranking of 60 countries on that variable.

In the ADB as of 2013, Tokyo held respective 16 and 13 per cent shares of subscribed capital and voting power. Understandably, at the AIIB’s inception, Beijing’s shares will be far larger. But how soon and by how much will China allow its initial dominance to be diluted by other contributing members? Concerns over Beijing’s intentions may already underlie the wait-and-see attitudes of Tokyo, Seoul, and Canberra as to whether to join the new bank.

Another alternative to international lending by traditional sources is the New Development Bank (NDB) recently innovated by the BRICS. Headquartered in Shanghai, it will be led first by an Indian.

In the formal sessions of APEC, lip service will be paid to its hopes for free and open trade and investment worldwide by 2020. But in the corridors delegates will debate whether China’s AIIB and the BRICS’s NDB will further ‘responsible stakeholding’ and shared governance by emerging states in a global economy no longer centred on the West. Some may fear that Xi wants to use these new institutions to tie Asia more tightly and deferentially to Beijing in a web of ‘Silk Roads’ that will disproportionally serve Chinese interests.

China’s ambitions will also be questioned at the East Asia Summit in Myanmar, especially regarding the South China Sea (SCS). China will again be asked to clarify its generously self-serving U-shaped line: Does Beijing really want to possess or control nearly all of that body of water? Southeast Asians will again urge China to implement the Document on Conduct (DOC) in the South China Sea that it signed with all ten members of ASEAN in 2002. China will again be implored to accept a future Code of Conduct (COC) regulating state behaviour in the SCS. But Beijing will likely continue to delay and demur, while ASEAN’s historic centrality to Asian region-formation continues to diminish.

It is symbolic of ASEAN’s plight that the group has been too divided to express more than ‘serious concern’ over ‘developments’ in the SCS — untethered abstractions that leave China happily uncharged. In ASEAN’s field of vision, the COC has become an entrenched mirage. Calls for a code are repetitively embedded in ASEAN’s communiqués because it is one of the few things the members can agree should happen. Thanks to Chinese foot-dragging, however, the goal keeps receding and Beijing keeps doing whatever it wants to in the SCS.

Chinese activity now includes a unilateral land-reclaiming and construction work at the specks that China already controls — actions that violate the spirit if not the letter of the DOC.

Some US$5.3 trillion in goods are shipped annually across the SCS, including US$1.2 trillion to or from the United States. China has unilaterally declared and begun to enforce a monopoly on fishing in more than half of the SCS. If multilaterally negotiated limitations are being flouted or forestalled in this key regional instance, how much confidence can one have that Xi will cooperate in Asia on behalf of a rules-based order at the global level?

None of this means denying the overdue need to restructure existing institutions to accommodate the voices and priorities of rising powers. But time is running out. Convincingly dire warnings in the just-released UN report on climate change render existential the need for concerted global action. Nationalism and nationalistic regionalism — by Beijing, Moscow or Washington — must not derail progress toward the constructive rebalancing and sharing of global governance. Shifting power to emerging actors should facilitate not frustrate that process. The twenty-fifth anniversary of the fall of one wall in Berlin should not be spent building another in Asia.

This article was originally carried by the East Asia Forum on Nov. 7 and reposted with permission.