FOREX trade

WSJ

MARGIN VOLATILITY: Although the Bank of Japan is likely to keep raising interest rates, causing the yen to strengthen, Japan's rates will remain relatively low for a long time, maintaining the attractiveness of the so-called carry trade, in which investors borrow at low interest rates in yen and invest in other currencies at much higher yields. The carry trade is believed to have intensified last week's global market dive when investors needed to sell their foreign-currency holdings to buy yen to cover their losses.

But even though we're through the period of volatility caused by the yen's reversing direction and rising since its Jan. 29 low, such currency plays may continue to amplify market volatility because of a significant change in Japanese investors' habits. A combination of technology, deregulation and low interest rates is enabling individual Japanese to use the same kind of investment techniques as big-money professional investors, global corporations or hedge funds. Borrowing money to trade currencies has become so popular in Japan that individuals sitting at their computers in homes across the country now trade tens of billions of dollars a day. Some days in recent months, they are estimated to have held foreign currency valued at more than five trillion yen, or $43 billion -- roughly equivalent to the amount of yen loans taken out by professional investors to speculate in foreign currencies.

The change flows from a 2005 financial-industry deregulation that made currency trading with borrowed money accessible to ordinary investors, as Yuka Hayashi reports. And instead of banks, which charge high fees, traders increasingly use low-cost online-trading services. More than 100 such companies were set up after the deregulation in 2005. And because Japanese interest rates are so low, they can borrow money against a deposit to trade, say, 20 times as much.

But investing borrowed money is highly risky because it can dramatically amplify losses as well as gains. Some brokers allow individuals to borrow 100 times the amount of money they deposit as collateral. Online-trading companies normally try to protect clients from losing too much money, typically by automatically selling off and closing down a client's investment if it threatens to spiral out of control and cause losses that would devour the collateral on deposit. That happened to many investors last week as the yen rose against the dollar. This type of selling, along with selling by hedge funds and other institutional players, pushed up the yen against the dollar and other currencies. It can do so again.

Read Yuka Hayashi's fascinating report from Tokyo:
http://online.wsj.com/article/0,,SB117338616555931381,00.html?mod=djemeurolinks