'Mrs. Watanabes' slam plan for margin-trading cap

by Yasuhiko Seki and Hiroko Komiya


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.”

Some 90.5 percent of individual currency traders oppose restrictions on leverage, and up to 20 percent say they may quit the market if the FSA mandates a limit on leverage, according to a survey of 2,665 individual traders conducted by Yano Research Institute Ltd.

“From the standpoint of housewives, who trade currencies using small amounts of sugar bowl savings, having high leverage is a critical part of foreign-exchange investments,” said Mayumi Torii, a housewife who chronicled her market experiences in a 2007 book titled: “My Method for Earning 1 Million Yen a Month by Trading Currencies.”

Four of the 120 currency margin brokerages in Japan allow clients to trade up to 400 times the amount of their deposits, while one provides leverage of just 20 times. Combined deposits in these accounts climbed to ¥696.4 billion as of March 2008, the most recent date for which an estimate is available, according to Yano Research.

Traders who use these accounts, who collectively came to be called “Mrs. Watanabe” since housewives traditionally control the purse strings, are seen as providing stability to the foreign-exchange markets due to their trading strategy.

“The gnomes of Zurich were accused in their day of destabilizing markets,” Bank of Japan Deputy Gov. Kiyohiko Nishimura said in 2007. “The housewives of Tokyo are apparently acting to stabilize them.”

The “gnomes of Zurich” was a term used by U.K. politician Harold Wilson to describe financial speculators based in the Swiss city who were speculating against the pound.

The average trading volume of foreign currencies in Tokyo swelled to $302.5 billion a day in April 2008, according to a survey by the Foreign Exchange Market Committee.

Currency margin traders now account for between 20 percent to 30 percent of daily turnover on average, JPMorgan’s Tanase said.

Some regulators are worried that margin-trading accounts are loading up brokerages with too much risk.

“Rising leverage on foreign-exchange investments may yield unexpectedly large losses beyond deposits that customers have set aside at brokerages,” Takafumi Sato, commissioner of the FSA, said June 1.

Foreign-exchange margin trading has surged in popularity in Japan since it was deregulated in 1998 as investors sought to earn higher returns than are available on government bonds in a country with a benchmark interest rate of 0.1 percent.

If currency volatility increases, corporations that earn revenue or build products overseas will have to spend more to hedge their foreign-exchange holdings or risk seeing currency fluctuations undermine earnings.

Capcom Co., an Osaka-based video-game publisher known for its “Resident Evil” series, says rising volatility in the yen may endanger its plans to boost the ratio of its game titles sold outside Japan to 65 percent of sales in the next two to three years.

“Fluctuations of the foreign-exchange rate do affect our overseas earnings,” said Ryosuke Tanaka, head of Capcom’s investor relationship department. “But since our company has a set rule of not hedging our overseas sales, we simply have to take it.”

Caps on leverage may put more pressure on households struggling to make ends meet during the recession, said Torii, who also founded a support group for home traders.

“There are women who raise children on their own by the earnings they make from forex margin trading, and I feel sincerely sorry for them, given the implications that the new rule may have,” she said. “If the lower leverage is implemented fully, individual investors may simply switch their playground to overseas markets.”

Japanese regulators should be more flexible on trading rules, said Makoto Utsumi, president and chief executive of Japan Credit Rating Agency Ltd.

“What’s important is to not kill the new market, which now offers an alternative investment opportunity for retail investors who are languishing from zero interest rates, and to make sure the rules aren’t excessively strict compared with those in overseas markets” said Utsumi, who was formerly the top currency official at the Finance Ministry.