Fundamentally, Yen movements is determined by Japan economic recovery. But there are three issues that Japan ought to resolve before that.

Abenomics since the beginning has gathered supporters as well as oppositions. But in its journey to reinvigorate the economy and encourage the return of inflation and economic growth, it has not worked the way it is. Despite of Japan government excitement around it, Abenomics so far has not yet been able to revved up Japan's engine of development. What's the problem?

There are three issues that Japan ought to resolve before wishing for any economic recovery:

 

1. Stalled Japan Exports

Although the Yen exchange rate has skydived in the past year, but overseas exports has not yet shown significant improvement over time. See the following figures.

JapanJapan Monthly Exports (2013 to April 2014)

 

Because exports is mediocre, consequently economic recovery turn to rely on the so-so domestic consumption. In the following graphic, we could see that Japanese retail sales ranges has not shown upward trends.

JapanJapan Retail Sales MOM (January 2012-April 2014)

The last high on the picture was simply people stockpiled goods in preparation of April 2014 consumption tax hike. This is getting worse by the minutes. Tax hike will surely add pressures to domestic demands, which means another blow to the flagging economy.

Of course, the Government has actually done many things to resolve this problem. Cool Japan campaign and more relaxed visa procedures are some of the more unique among Japan efforts. But the thing is, something that is cool could turn out awkward when it is being carried out by stuffy government officials. Add to that, South Korea has applied similar programs much more successfully, and that represents a tight competition in culture and tourism sector.

 

2. Falling Population of Japan

Japan population is worrying. The decline of productive age people has reached a critical point. There are fewer babies born each year and more retirement age individuals cropping up. If this goes on, not only national productivity is in danger, but the small number of productive age people have to shoulder the social service burden of more pensioners than ever. Additionally, the growing number of individuals in NEET (Not In Education, Employment, or Training) is disheartening. If these issue went unresolved within the next few years, then we could say that Japan has committed demographic suicide.

JapanJapan Ten Year Population Data (2004-2014)

 

3. Japan Nuclear Energy Dilemma

Japan has not found a proper solution to its energy supply problem. Japan mainly relies on energy supply from nuclear reactors that scattered across Japan archipelago. However, after Fukushima nuclear disaster in 2011 that has not found correct solution to this day, the use of nuclear reactors has gathered oppositions and take the main stage in political debates. It was just yesterday (21/5) that a court in Japan reject startup of two nuclear reactors that the area clearly needed to supply energy.

On the other hand, cooperations with Russia over new energy exploration and fossil fuel supply turns problematic since the US has sanctioned Russia over Ukraine crisis. For a geographically small country, Japan needs a lot of heat, both in Summer and Winter that often turn extreme, both for households and industry as Japan is a technologically advanced country that needs a lot of energy supply. This issue is not necessarily about Japan nuclear energy as much as Japan energy supply. If Japan find an applicable new energy source, then this issue could be properly resolved.

The three reasons are what is fundamentally caused Japan economic recovery to stall in the current level. Economic growth could not be resolved just on statistics. The basics of what drives those statistics to turn up or down are even more important. Of course, as the Government apply more programs in place, we have hopes that those will actually work well in the end. But so long as those issues went unresolved, we think Japan economic fundamental may still have far to go.