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 March 2011, an earthquake and tsunami hit the eastern coast of Japan and caused one of the worst nuclear meltdowns ever seen. In the lead-up to that week, U.S. officials there were bracing themselves for a media firestorm following a controversial Wikileaks release, Japan’s new foreign minister was ushered into office, and an apology statement was delivered on behalf of the United States in Okinawa, explained the top U.S. diplomat who was posted there at the time.

“And that, was just a microcosm of all kinds of things going on during my tenure there,” said John Roos, who served as the U.S. ambassador to Japan from 2009 to 2013.

Speaking at Stanford, Ambassador Roos offered views on his tenure as ambassador at a seminar led by the Japan Program at the Walter H. Shorenstein Asia-Pacific Research Center (APARC). The diplomatic posting, underpinned by the strong U.S.-Japan alliance, proved an essential role for coordination of U.S. aid when the disaster struck.

Roos spoke in conversation with Ambassador Michael Armacost, his counterpart who served in the same position from 1989 to 1993, who is now a distinguished fellow at Shorenstein APARC.

“By far, [it was] the biggest crisis I had to deal with in my career,” said Roos, who has years of experience in business and law, and is now the CEO of the Roos Group.

Roos said he first took steps to open lines of communication between local staff, and the Japanese and U.S. military commands there. He went with his team on a dozen trips across the country. Fact-finding missions were necessary to assess the situation, as much as they were symbolic in showing a commitment to the people of Japan, he said.

Asked about his background, Roos said his academic training was valuable throughout his career. He is a graduate of Stanford University and Stanford Law School.

Leaders tasked to coordinate response crisis efforts, especially those concerned with nuclear issues, are often across many intergovernmental organizations and in turn, lead to a conflicting set of opinions. He said his ability to navigate tough situations harkens back to his training at Stanford, which emphasized building consensus and thinking critically.

Later, Armacost also underscored the role of people – who’s involved and their individual personalities – and their influence on policy decisions.

“Personal relationships are so important,” Roos said, “they drive everything.”

People-to-people connections were a similar theme mirrored in Roos’ perspectives on the future of the Japanese economy and the country’s relations with neighboring countries. As ambassador, Roos started the Tomodachi Initiative, an educational exchange program linking young leaders from the United States and Japan.

Following the crisis, in 2012, Japan ushered in Prime Minister Shinzo Abe and the Liberal Democratic Party (LDP) became the ruling majority party. One facet of Abe’s vision includes a stimulus package, commonly referred to as ‘Abenomics,’ intended to restore the country’s economy after more than a decade of slow growth.

Roos said most Japanese have a tepid attitude toward Abe’s policy ever since implementation of the final round of policies which are intensely focused on structural reforms. The reforms are necessary to restart growth, he said, but the average citizen will likely feel an impact due to a paring down of resources across public services.

But, entrepreneurism provides a credible direction for the country’s economic revival, and could help carve out a defined role for Japan in the global marketplace.  

In Japan, “there is incredible innovation going on,” he said. Individuals and universities are producing a myriad of cutting-edge technologies, and the ecosystem to support this is growing, but not yet fully adopted.

He said a key driver behind Silicon Valley’s success is the spirit of entrepreneurism widely shared there. People actively take risks, exchange ideas, and most importantly, embrace failure.

Roos said he carried that message with him wherever he went in Japan, often referencing the example of Mr. Abe who came back for a second term as prime minister. “That’s the culture of Silicon Valley, and that’s the culture that we want to promote in Japan.”

Two weeks ago, North Korea surprised the world by sending three of its top leaders to the South to attend the closing ceremony of the 17th Asian Games in Incheon. The visit occurred in the midst of growing speculation that North Korea's young leader, Kim Jong Un, was seriously ill, or even that he had been removed from power. That dramatic and unprecedented visit gave renewed hope for improved inter-Korean relations, which have been frozen since the sinking of a South Korean vessel in 2010.

The strategic situation on the Korean Peninsula has continued to worsen over the past several years. To produce material for more nuclear devices, Pyongyang has proceeded with a large-scale uranium enrichment program. The International Atomic Energy Agency recently expressed concern that North Korea may also have reactivated its plutonium production facilities, another means of making fissile material for nuclear bombs. Meanwhile, having rocketed its first satellite into orbit in December 2012, the North is busily developing longer-range missiles to target not only the South but also Japan and the United States.

Unfortunately, there is no initiative on the horizon likely to change this dangerous trajectory. The United States was willing to negotiate with Pyongyang when there was a chance of preventing it from developing nuclear weapons. With that goal now deemed unachievable, Washington is instead intent on containing the threat through increased sanctions and counterproliferation efforts, missile defense, and heightened defense cooperation, with South Korea and Japan. U.S. engagement with North Korea, much less negotiation, is off the table and likely to stay that way.

China's buffer     

Earlier hopes that China would prove to be a deus ex machina have also foundered. While Beijing does not want Pyongyang to have nuclear weapons, it has always been more concerned about preventing instability in the North that might spill across their shared border. More recently, deepening suspicions among Beijing's leaders about U.S. strategic intentions have made North Korea even more important to China as a strategic buffer. China remains by far Pyongyang's most important foreign supporter, as reflected in the burgeoning trade across their border.

That leaves South Korea as the only country that could play a larger and more positive role in tackling the North Korea problem. South Korea is no longer a "shrimp among whales," as it used to think of itself, but a major "middle power." Strategically, Seoul is increasingly important not only to Washington but also to Beijing.

South Korea, however, has been a house divided when it comes to how to deal with the North. Conservative administrations, fearing that a North Korean nuclear arsenal would change the long-term balance of power on the peninsula, have made the North's denuclearization a condition for virtually all engagement with it. Progressive governments, on the other hand, have glossed over the nuclear issue, believing that increased contact will eventually promote change for the better in Pyongyang. The result has been South Korean policies that, whether from the left or the right, have proved unsustainable and ineffective.

"Tailored engagement"     

Based on a yearlong study, my colleagues and I have called for more active South Korean leadership to ameliorate the situation on the Korean Peninsula. We call the concept "tailored engagement." It is based on the conviction that engagement is only one means of dealing with North Korea, but an essential one, and it must be carefully "tailored" or fitted to changing political and security realities on and around the peninsula. It eschews an "appeasement" approach to Pyongyang as well as the notion that inter-Korean engagement under the current circumstances would be tantamount to accepting the North's misbehavior, especially its nuclear weapons program.

Such engagement would not immediately change the nuclear situation, but, if carefully considered and implemented, it need not encourage Pyongyang in that regard, either. Meanwhile, it could help to reduce bilateral tensions, improve the lives of ordinary North Koreans and bring the two societies closer together. It could reduce the risk of conflict now while fostering inter-Korean reconciliation and effecting positive change in the North.

South Koreans must first, however, develop a broader domestic consensus in areas and in ways that do not undermine the international effort to press Pyongyang to give up nuclear weapons. That is possible because many forms of engagement are in fact largely irrelevant to the nuclear program. For example, South Korea could provide much more humanitarian assistance to ordinary North Koreans; it could also engage in more educational and cultural programs, including sports exchanges. Concrete offers of expanded economic exchanges and support for the development of the North's infrastructure could become part of an incentive package in renewed six-party talks on ending the North's nuclear program.

Speculation about the state of Kim Jong Un's health and the North Korean leaders' visit to the South underline the fact that North Korean politics and society are experiencing great flux. For the outside world, this creates uncertainty, but also offers the possibility of positive change. Tailored engagement can at least test, and perhaps also influence, a changing North Korea.

Even a carefully "tailored" engagement strategy is no panacea. It is only one tool for dealing with the North -- military deterrence, counterproliferation and human rights efforts are among the others that are essential -- but why not try all available means when the situation is so worrisome? Japan should support such an approach because its interests, too, are threatened by the increasingly precarious situation on the peninsula.

This article was originally carried by Nikkei Asian Review on Oct. 16 and reposted with permission.

Economic and demographic transition pose major challenges for countries worldwide, particularly in large developing countries like China; however, strengthening social welfare programs can offset negative effects and help promote a sustainable future, according to Karen Eggleston, a scholar of Asia health policy at Stanford University.

“Unprecedented economic growth in China spanning the last three decades has lifted hundreds of millions out of poverty and restored China to the prominence in the world economy that it once enjoyed centuries ago,” said Eggleston, who is a Center Fellow at the Walter H. Shorenstein Asia-Pacific Research Center.

“Demographic change not only shapes the trajectory of [its] development, but interacts with macroeconomic and microeconomic forces” in numerous ways.

Eggleston, who presented “China’s Demographic Change in Comparative Perspective: Implications for Labor Markets and Sustainable Development” at the Jackson Hole 2014 Economic Symposium “Re-evaluating Labor Market Dynamics,” says a combination of societal changes makes China distinctive, and that the country can offer insights in comparative perspective. She joined two other experts for a panel discussion on demographics during the three-day conference led by the Federal Reserve Bank of Kansas City, which draws dozens of central bankers, policymakers, academics, and economists from around the world.

The research stems from a project that Eggleston heads on policy responses to demographic change in Asia. The initiative, which is a part of the Asia Health Policy Program, grew out of a 2009 conference cosponsored by the Global Aging Program at the Stanford Center on Longevity. Its outcomes have included the publication, Aging Asia, a special issue of the Journal of the Economics of Aging focused on China and India co-edited with David Bloom of Harvard University, and two forthcoming books on urbanization and demographic change in Asia.

China in flux

China is the most populous country in the world with more than 1.3 billion people. Its sheer size alone creates heavy demands as demographics change, and the economy continues its shift from a centrally-planned system to a market-based system.

China’s population age 60 and older is projected to increase from one-tenth of the population in year 2000 to a staggering one-third by year 2060. Simultaneously, the population age 14 and under is projected to decrease by one-third between years 2010­ and 2055 (Figure 2).

Eggleston, and others who closely watch the situation, say these demographic changes will bring a myriad of challenges to the labor market and to cultural norms related to intergenerational support, work and retirement.

China’s low birth rates have largely been influenced by family planning campaigns that begun in the early 1970s, and later, the “one child policy,” a population control policy that allowed for the birth of only a single child in many families. Recently, the government has relaxed that policy, and analysts believe the change will eventually help to balance the population age structure and infuse the workforce with new employees, filling the void caused by retiring workers in the coming years.

In the meantime, preparing support structures for the older generations’ departure from the labor market is essential. Social welfare programs, including health insurance and retirement and childcare services, will see significant demand, and require restructuring to handle the influx.

China’s aging population experience is similar to other countries in Asia. Japan, South Korea and India are also projected to see significant increase in median age over the next 30 years (Figure 1). 

Eggleston says China has made positive steps toward restructuring its institutions, including establishing government-subsidized health insurance programs and reforming pension systems. Most notably since 2002, China took a large step towards universal health care by implementing the New Rural Cooperative Medical Scheme for rural residents. Now, nearly all citizens have access to basic medical care, which can support healthy aging as well as mitigate large “precautionary savings” and help those struck by medical conditions requiring significant services.

A pension system for people in China’s rural areas, developed by the government in 2009, also set up a supportive system by providing increased transfers for seniors, and, interestingly, supporting labor markets by easing the worries of adult children who migrate to urban areas for work.

China has been forward thinking with its related public policies, but it certainly can do more, Eggleston says. Integrating technology into its health systems, and making its services more fiscally responsible could improve efficiency, and expand access to care.

The full paper and handout from Eggleston’s presentation at the conference are available on the Federal Reserve of Kansas City website.