High-risk trading becoming popular among Japanese investors

Japan’s rock-bottom interest rates provide cheap credit but little incentive for savers to stash cash in a bank account, so more and more ordinary Japanese are turning to currency trading to boost their savings.

One 59-year-old Tokyo housewife is in trouble with the Japanese authorities for allegedly failing to declare 400 million yen (US$3.4 million) in profits from foreign exchange margin trading over three years.

This type of high-risk trading has become popular among Japanese as it offers the chance to earn hefty profits, although they can also be left with much bigger losses than the amount they deposited.

“The market certainly has grown substantially,” said James Gow, chief executive of FX Online Japan, one firm which offers margin trading.

“We have a great cross section of investors ranging from a sushi chef to a professional trader to a 20-year-old to our oldest customer who’s about 74 years old,” he told AFP.

Japan’s wave of post-war baby boomers are increasingly looking overseas for better returns on their savings, which means exchanging yen into euros, dollars or other high-yielding currencies.

This has helped to drive the euro up to record highs against the yen, while keeping the Japanese currency weak against the greenback.

“The most important driver of the yen’s weakness is the Japanese household sector’s capital outflow, which is regarded as stable and very likely to continue,” said Toru Umemoto, forex strategist at Barclays Capital.

He estimates that carry trade by Japanese households amounts to 46 trillion yen, which could be far more than speculators’ carry trade.

“Carry trade has been increasing and is likely to increase further. Japanese individual investors constantly export their capital overseas. They are very unlikely to repatriate (these funds) immediately,” Umemoto said.

Other more adventurous investors are not using their savings but taking advantage of Japan’s low interest rates, which analysts say have been encouraging a credit bubble as investors borrow cheap yen to invest overseas.

Interest rates stand at 5.25 percent in the United States and Britain, 3.75 percent in the eurozone and just 0.50 percent in Japan, which is still struggling to decisively exit years of deflation.

No one knows the exact magnitude of the yen carry trade, although Tim Lee of the U.S. research firm Pi Economics reckons that the true size could be in excess of US$1 trillion — equivalent to the annual national output of Canada.

But while investing overseas or forex day trading is becoming more popular, it seems that the real power when it comes to playing the market still lies with the big financial institutions.

“The whole global foreign exchange market is something like US$3 billion a day and the retail market is substantially less than that, so certainly the guys in the dark suits at Goldman and Morgan Stanley, they’re still pushing the buttons,” said Gow at FX Online Japan.

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