Trading activity in the Japanese retail FX market remains remarkably resilient despite two rounds of leverage reduction. The estimated US$ 71 billion in daily trading volume of December 2011 is just shy of the US$75 billion daily volume seen three years earlier. The August 2010 FX margin policy change raised the maximum leverage to 50:1 from levels as high as 700:1; while the August 2011 cut took the maximum leverage to a mere 25:1—this present rate is well below the 50:1 maximum leverage in the United States and 200:1 common leverage offered in the U.K.
During the past three years, Japanese retail FX traders doubled margin deposits to JPY 1.01 trillion (US$13.1 billion). This increase was in keeping with the doubling of retail FX accounts to 4.35 million. Of course, the new restrictions are leading to account growth that is decreasing over time —it was up 10% year-over-year in December 2011 (Figure 2). The number of active traders has been steady around 650,000 people, but the annual rate of growth for this group fell to -4% for the first time on record in Q4 2011. But a rapid (22% y-o-y) rate of increase in margin account balances indicates that traders at large are committed to do what it takes to participate in retail FX under the higher margin requirements.
SHIFTING PREFERENCES
One of the reasons for the declining rate of trader activity has been yen strength relative to other major currencies. Japanese traders have long favored carry trades, essentially trying to go long currencies that they were comfortable with and which offered a higher yield than the yen. Japanese investors have consistently held long US dollar positions over time, but a weak USD forced these account holders to make the majority of their investing in euro based pairs (EURUSD, EURJPY) over the past three years. The more intense stage of the European crisis which began in the summer of 2011, however, changed that.
Uncertainty over the future of the euro precipitated a sharp change in terms of the currency pairs Japanese retail FX traders preferred. Since then, the combined long-short EURUSD (dollar-euro) total holdings of Japanese traders fell sharply from 40% to 6% of all foreign currencies held. Retail traders had a short-lived flirtation with EURJPY (dollar-yen) but this pair basically remains steady around 20% of all foreign currency holdings.
Figure 3: Japan Retail FX Holdings: Euro-Based Pairs
Meanwhile, demand for the US dollar has been steadily on the rise, with the USDJPY (dollar-yen) pair now representing 34% of all foreign currency holdings of Japanese traders, a multi-year high. This returning interest in the USD dollar is leading an increasing number of retail FX traders to sell yen and push USDJPY higher, now past the very significant USDJPY 80 big figure. I suspect that this rally we have started to see is solid and has plenty of leg . More importantly, we believe it will bring more Japanese retail traders out of the sidelines to short the yen and begin to derive a modest carry on a pair they have long favored. But the changing foreign currency preferences of Japanese traders may not stop at the US dollar. The rise in preference for AUDJPY points to a not-subtle interest for higher yielding pairs, a good omen for exotic currencies such as the South African rand, Brazilian real, and Turkish lira.
Figure 4: Japan Retail FX Holdings: Dollar-Yen and Aussie-Yen
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