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.

Michael McFaul, the next director of the Freeman Spogli Institute for International Studies who recently returned from his position as U.S. Ambassador to Russia, joins Karl Eikenberry, the former U.S. Ambassador to Afghanistan and the William J. Perry Fellow in International Security at CISAC, to discuss the current state of foreign policy. The Nov. 11, 2014, talk was part of the fall course, "State of the Union,"  which examined major themes that contribute to the health, or disease, of the U.S. body politic.

Led by Rob Reich (Political Science), David Kennedy (History), and James Steyer (CEO, Common Sense Media), the course brought together distinguished analysts of American politics who noted that we live in an age of rising inequality, dazzling technological innovation, economic volatility, geopolitical uncertainty, and the accumulating impact of climate change. These conditions confront our political leaders and us as citizens of a democracy plagued by dysfunction.

The recently manifested massive failure of America's intervention in Iraq has led outside observers to speculate that the ongoing rapid drawdown of international military forces in Afghanistan will lead to similar chaos in that country, Karl Eikenberry writes in this Foreign Policy commentary about the new Asia Foundation survey of the Afghan People.

Eikenberry notes that Ahmed Rashid, a commentator on Afghanistan security issues and author of the superb book Taliban, wrote in a recentNew York Times op-ed that the U.S. troop withdrawal plan formulated in 2009 "is proving catastrophically wrong now." Senators John McCain and Lindsey Graham warned two months ago: "If the President repeats his mistakes from Iraq and withdraws all U.S. troops from Afghanistan, based on a certain date on a calendar, we fear a similar failure will unfold ... as we have seen Iraq."

Eikenberry, the William J. Perry Fellow in International Security at CISAC and former U.S. Ambassador to Afghanistan, writes that the Asia Foundation's just-released 2014 Survey of the Afghan People indicates that while the Afghans do worry about the future of their country, they by no means share the deep pessimism of the foreign prophets of doom who assert that it is only a matter of time until the disaster on the Euphrates is repeated on the Kabul River. Comparing the attitudes of the Afghan and Iraqi people on key political, security, and economic issues helps explain why this is so.