End of Era Looms for Japanese FX Leverage?

Japan's Financial Service Agency will reportedly will limit the amount leveraging available to retail foreign exchange participants, who according to estimates account for around a quarter of the daily turnover in Tokyo, which according the the BIS survey averaged about $302 billion a day.

The FSA plans call for capping leverage starting next year at 50-times and then cutting it to 25-times at the start of 2011. Currently, reports suggest that leverage is possible up to 400-times currently at some firms. Japan had de-regulated retail foreign exchange margin (leverage) trading nearly ten years and it has help bolster the activity. A private survey, reported in the some news accounts, found that up to 20% of those with margin accounts indicated that the caps on leverage may prompt them to quit.

With low returns available in domestic asset markets, households have moved savings overseas through mutual funds as well as through directly through playing in the currency markets. At the end of the day, however, 25 times leverage does not seem to be an onerous cap. At 25-times leverage, a 4% move, which is essentially the gain in the yen from June 5th to June 23rd would have wiped out one's capital (if one was long dollars during the time, which given the widening interest rate differential and the Japanese purchases of U.S. bonds is not an unreasonable scenario). Alternative, consider that the Australian dollar, another high interest favorite of the famed Mrs. Watanabe, fell 8% against the yen between June 11th and June 23rd.