A plan to increase restrictions on Japan's margin-trading market may drive individual investors away, paving the way for more volatile currency movements, according to JPMorgan Chase & Co.
The Financial Services Agency, which regulates the margin-trading industry, intends to cap the leverage permissible on currency trades at 50 times the amount of cash being committed starting in 2010, and reduce it to 25 times in 2011. This is likely to deter individual traders, many of them housewives, whom the Bank of Japan says help stabilize currency trading by buying on dips and selling into rallies.
"Restrictions on leverage could trigger an exodus of forex margin traders," said Junya Tanase, a foreign-exchange analyst at JPMorgan in Tokyo. "As margin accounts typically trade with a 'buy on dips, sell rallies' strategy, flows from those trades have played a key role in containing market volatility."