The margin buying position of Japanese stocks has climbed to its highest level since 2006, and with the stock market falling from its peak, a large number of retail investors with high leverage bets are facing the risk of liquidation.
The drop in the Japanese stock market from its historical high has brought another major risk: bullish individual investors have built their largest margin buying positions since 2006, and they may have to close out their positions.
As of June 21st, the total holdings of retail investors nationwide in Japan reached 4.91 trillion yen (approximately $308 billion). Although the Nikkei 225 index has fallen 4% since reaching its peak in March, leveraged, and often high-risk bets continue to expand.
The demand for margin buying is still strong despite the stagnation of the Japanese stock market.
Due to weak domestic economic growth in Japan, disappointing corporate earnings guidance, and concerns about the impact of the Bank of Japan's interest rate hikes, the Japanese stock market has lagged behind its global peers in recent months. Margin buyers are actually borrowing money from brokerages to buy stocks, usually using high leverage. If the market is weak, investors may need to close out their positions, leading to further selling.
Despite the decline in the Japanese stock market, the demand for margin buying is still strong. The margin buying positions of retail investors are 6.4 times higher than the selling positions, much higher than the historical average of 3.31, indicating that they are still bullish on Japanese stocks. One of the highlights is corporate earnings: if profits increase, it may prompt companies to raise wages, which would be a bullish sign for consumers.
Masayuki Doshida, a senior market analyst at Rakuten Economic Research Institute, said, "It's about a month away from earnings season, and people are waiting for earnings guidance to be upgraded. But if we don't see that, we need to be cautious about margin buyers selling."
Margin buying positions in Japanese stocks are quite bullish.
Most margin trading provided by brokerages to investors has a term of only six months. Kohei Onishi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co., said investors may end their positions before September, as their positions began to accumulate when the stock market reached a record high at the beginning of this year.
If the Bank of Japan may raise interest rates again next month, the cost of margin buying positions seems to be increasing. Raising interest rates to about 0.25% may not sound high, but it would be the highest policy interest rate in Japan since 2008, sparking concerns of unintended consequences.
Some analysts believe that concerns about margin positions have been overblown. Currently, these positions only account for 0.5% of the market's total market capitalization, compared to a peak of over 1.1% in 2006.
Seiichi Suzuki, chief stock market analyst at Tokai Tokyo Intelligence Laboratory, said that the risk of investors being forced to sell is limited because their positions are currently suffering minimal losses.
Nevertheless, recent leveraged buying still reminds some people of the scene in 2006 when margin trading surged to 5.5 trillion yen.
"There are similarities. At that time, we experienced a weak yen, rising commodity prices, and interest rate hikes by the Bank of Japan, which eventually led to the Lehman crisis," said Tomoichiro Kubota, a senior market analyst at Matsui Securities Co. "I hope history doesn't repeat itself, but it may rhyme."