Margin trading in Japanese stocks sharply shrinks after market rout

By Junko Fujita

TOKYO (Reuters) – Trading using borrowed money, or margin trading, in Japan’s stock market fell sharply last week as investors were forced to dump stocks during the index’s biggest fall in nearly 40 years.

BY THE NUMBERS

Margin trading, which involves using borrowed cash from brokerages to ramp up bets in the stock market, is popular among Japanese retail investors.

Margin trading accounts for about 70% of retail trading value, the exchange data shows.

The value of shares bought on margin fell by 907 billion yen ($6.15 billion) to 4 trillion yen in the week ended Aug.9, from the previous week’s 4.87 trillion yen, according to Japan Exchange Group, which runs the Tokyo Stock Exchange.

The amount hit a record high of 4.98 trillion yen in the week of July 26.

The Nikkei plunged 12.4% on Aug. 5 in the market’s biggest single-day decline since the 1987 Black Monday crash and bounced back 10% the following day. The index fell as much as 27% from its July peak above 42,000 by Aug.5.

It has since recovered and is now trading at around 36,721 as of early Thursday.

WHY IT’S IMPORTANT

The sharp drop in shares bought on margin suggests leveraged retail traders – responsible for about 20% of the value in Japan’s brokerage trading — were burned in that week and are likely to be shy about returning for a while.

Margin trade helps investors expand their trading volumes, but it inflates losses when the market is down by forcing the investors to offload shares.

Strategists said the drop in the Nikkei last Monday was exacerbated by such margin calls.

($1 = 146.8300 yen)

($1 = 147.5000 yen)