The Japanese retail investor, who was a key participant in the yen carry trade ahead of the financial crisis, appears to have gone into retreat thanks to a continuing tightening of leverage restrictions from the Japanese authorities and the lack of volatility in the yen. Wary that currency volatility might cause a wave of wealth destruction among Japanese households, the country’s Financial Services Agency capped the maximum leverage permissible on margin trading firms at 50 times in 2010 and lowered it to 25 times in August 2011. Ahead of the restrictions, some firms were offering leverage of up to 400 times.
Bank of Tokyo-Mitsubishi UFJ (BTMU) says it has seen a sharp drop off in FX flows from the Tokyo Financial Exchange (TFX), which has been reflected in the exchange’s official positioning data. The average open position was 566,100 contracts in the final quarter of 2011, compared with an average of 322,900 contracts so far this year – a 43% drop.
| Open positions on TFX ($ billions) |
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| Source: TFX, Euromoney FXNews |
Derek Halpenny, head of FX strategy at BTMU, says the drop in volumes on the TFX partially relates to a tax change that came into force in January, which meant that trading profits from exchange-traded products were taxed at the same rate as the over-the-counter market.
However, Halpenny adds that the 25-times cap introduced in August is also having a gradual impact on the market.
Indeed, a fascinating piece of research from LeapRate, the online forex analysis firm, contends that Japan has lost its position as the world’s number one retail foreign exchange market.
Gerald Segal, CEO at LeapRate, says two years of successive leverage reductions have taken their toll, while the lack of volatility in USDJPY has not helped encourage volumes.
LeapRate, which bases its estimates on conversations with market participants, as well as information provided by certain firms operating in Japan, reckons the Japanese retail FX market generates volumes of $35 billion per day, down from $65 billion before leverage restrictions were imposed. That puts Japan’s retail FX market in second place globally, according to LeapRate, behind Europe at $71 billion.
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| Source: LeapRate |
Segal says while several sources still call Japan the world’s most active retail FX market by volume traded, with some even stating it measures about half of the entire global market, the evidence from publically available figures shows otherwise.
He cites 2011 results from Swiss-listed Compagnie Financière Tradition (CFT), which owns 49.5% of Gaitame, one of Japan’s leading retail FX companies. CFT reported revenue at Gaitame fell 46% in 2011 to SFr58million ($64 million), which, using industry standards, translates into $55 billion of monthly trading volume.
“If Gaitame, arguably the largest Japanese firm, is doing in the neighbourhood of just $55 billion in monthly volume, or about $2.5 billion per day, there is simply no way that the overall Japanese market is, as we’ve seen others estimate, as big as $100-$150 billion per day,” says Segal.
“We stick by our earlier estimate of about $35 billion per day for the Japan forex market, or about 19% of the overall global market.”
The question is whether this is a game changer for the FX industry or whether Japanese retail investors will return to the market once global yields pick up.
As Halpenny points out, one of the factors that drew retail investors to the FX market was exasperation with the returns and a series of scandals on the Japanese equity market at start of the last decade.
But while Japan’s retail investors are disenchanted with FX for the moment, they are not piling into any other asset class.
One thing is clearer, however – a persistent yen seller is moving on to the sidelines.