Sitting before a cluster of 10 computer screens in mid-June at his apartment with the drapes shut, Naoki Murakami makes $3,500 in a few seconds betting that Tokyo Electric Power (9501:JP) stock will fall a fraction of a percent. The 34-year-old day trader borrows 50,000 shares from his broker and sells them at 558 yen ($5.58) each. As the stock falls, he repeats the process three times, selling at 557, 556, and 555 yen. When the stock hits 554 yen he buys 200,000 shares, the number he had borrowed. The series of trades—short sales—nets him $2,500. Seconds later he sells Tokyo Electric short again, earning $1,000 more. Within minutes of the market opening, the former water-purifier salesman had made more than the average Japanese worker earns in a month.
Murakami calls himself the smallest player in a group of seven day traders who chat with each other online, vacation together, and cumulatively buy and sell almost $100 million in stocks each day, using borrowed money to increase the size of their bets. By seeking to profit from small price movements in actively traded stocks and indexes, day traders such as Murakami have helped make Japan the world’s most volatile developed market: The Nikkei Stock Average Volatility Index in recent weeks reached the highest level since the earthquake and tsunami in March 2011. Price swings, in turn, help the traders, by allowing for bigger gains when they bet correctly on a stock’s direction. “They’re creating the volatility,” says Curtis Freeze, chief investment officer at Prospect Asset Management in Tokyo. “It’s great for them, but for the average long-term investor, it just scares them away—including me.”
Day trading took off with Prime Minister Shinzo Abe’s stimulative economic policies. Known as Abenomics, the fiscal and monetary initiatives are meant to jump-start the economy and end years of deflation. In a little more than six months starting in November, the Nikkei 225 stock index climbed 80 percent before falling 15 percent in four weeks. It has bounced 15.8 percent since its June 13 low. “Watching stocks go up and up since the start of Abe’s government got me thinking about investing,” says Maki Murayama, a 38-year-old Tokyo office worker. “But seeing what’s happened lately, I realize it’s not that simple.”
Thanks in part to day trading, Japanese individuals now account for more than 40 percent of the nation’s equity volume, or about as much as the overseas financial institutions that once were the biggest traders, according to the Tokyo Stock Exchange. That’s up from the 27 percent level for individual trading in November. Along with the rally, deregulation of margin trading opened the floodgates to day traders, according to Murakami. Since the rules were relaxed in January, investors, who are allowed to borrow three times as much as their brokerage account balances, can take out new loans as soon as they repay the old ones. Previously they had to wait three days. “Now you can borrow endlessly,” says Murakami, who works in a T-shirt and shorts out of a spare bedroom in his rented apartment in Osaka.
Pointing at price charts on his screens, Murakami says that each day he bets the equivalent of millions of dollars on fast-moving stocks such as GungHo Online Entertainment (3765:JP) and Uniqlo owner Fast Retailing (9983:JP), the most heavily weighted company on the Nikkei 225. Tokyo Electric Power is another favorite. Battered by the meltdowns at Fukushima, the utility has become a ping-pong ball for speculators, moving more than 7 percent on an average day this year and accounting for about 1 in every 10 shares changing hands on the Nikkei 225 in May.
Murakami says he’s made $350,000 this year, about three times his average take in the previous eight years. One of Murakami’s friends, who goes by the blog name Tesuta, says looser margin rules let him leverage $4.5 million in cash into as much as $67 million in daily stock bets. Tesuta holds up a handwritten ledger and shows his account balance at brokerage firm SBI Holdings (8473:JP) as proof. He asked that his name not be cited for privacy reasons. On an average day, the group of seven day traders to which Murakami and Tesuta belong buy and sell $80 million to $100 million in Japanese stocks, according to estimates from the members. “These guys are pros,” says Jesper Koll, head of Japan equity research at JPMorgan Chase (JPM) in Tokyo. “They’re acting like a proprietary trading desk at a major investment bank.”
Making money isn’t easy, Murakami says. With $100,000 in savings and no experience in the market, he started trading stocks from a desktop PC in 2005. Within two months he’d lost half his stake. He kept improving his results, but trading in Japan’s stagnant market was like trying to sail a boat without any wind—until this year. “When shares don’t move, you can’t get an opening for a trade,” he says. “Now that the market is moving, I feel like I have to make the most of it.”
The bottom line: Individuals accounted for more than 40 percent of Japan’s stock trading volume in May, up from 27 percent in November.