Mrs Watanabe broke retail FX trading records in 2022
In a “Bank of Japan Review” research paper published in Japanese on Friday, the authors analyze Japan’s retail FX trading ecosystem in 2022, a record-setting year for the proverbial Mrs Watanabe.
Japan’s share of global retail FX trading volume is around 30%, while it makes up only about 7% of the interbank FX spot market. Retail FX trading emerged after the 1998 revision of the Foreign Exchange Law. Since the introduction of the FX company registration system in 2005, the trading environment has improved with the wide availability of smartphones, and trading spreads have narrowed due to intensifying competition among FX companies. Since 2010, progress has been made in reviewing regulations, such as the introduction of margin requirements, but the trading volume of FX companies has continued to rise, albeit with fluctuations.
Trading volume in 2022, which saw significant FX volatility, greatly exceeded the past average, surpassing JPY 1,000trn on a monthly basis and JPY 10,000trn on a calendar year basis for the first time.
Traditionally, the Japanese retail FX trader (aka “Mrs Watanabe”) has been a carry trader who makes a profit by selling the low interest JPY and holding a higher yielding currnecy, such as AUD or NZD. 2022, induced by the higher volatility with more trading where the JPY moved one yen or more against the USD, saw a shift to a higher share of day trading.
The authors note that while open interest has approximately doubled compared to ten years ago, the trading volume has increased more than seven times. For retail FX traders overall, this is thought to be an indication of a shift from earning from the interest rate differential to gaining from short-term market fluctuations. Furthermore, considering that the increase in transaction volume exceeds the increase in the number of accounts, this increase in transaction volume is attributed to increased activity by existing investors rather than to the expansion of the investor base.
Another shift in retail FX trading in 2022 was towards the USD/JPY trading pair. While only accounting for about 25% of the trading volume in 2012, its share increased to about 75% in 2022, dominating the retail FX market place. This contrasts with the USD/JPY trading share in the interbank market, which has remained generally stable at around 50%.
A catalyst for increased day trading was certainly the low trading cost, due to the highly competitive nature of the retail FX market. Operating mostly without trading fees, spreads on the retail side have compressed so much that a USD 10,000 can be executed for JPY 20, while the interbank market actually charged higher spreads (up to ten times as much) due to the higher volatility in the FX markets. In essence, for those FX companies that hedge any positions that cannot be internally matched in the interbank market, the increased cost/spread was not passed on to the retail customer.
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