Six most common risks US-stock traders face in Japan

Six most common risks US-stock traders face in Japan

Written by Ludovic, In Finance, Published On
June 21, 2022
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The Japanese economy is growing, and this is in part due to the strengthening relationship between the Japanese and global markets. Currently, Japan’s economy ranks third in the world, and the country has a GDP of over $5500 billion, depending mainly on exports such as car vehicle parts.

In this article, we’ll talk about how US stocks can be traded in Japan, common risks that US-stock traders in Japan face, and ways to mitigate them.

The foreign stock market in Japan

The biggest foreign stock market in Japan is the Tokyo Stock Exchange (TSE). Alongside US stocks, the exchange provides many foreign stocks from different regions like the Eurozone, Asia, and Southeast Asia.

Foreign stocks listed on the TSE are classified as ‘blue chip’ companies that hail from a foreign country and are listed on their country’s stock exchange, and foreign companies that are listed directly on the TSE.

The good thing about investing in foreign stocks in Japan is that all transactions take place in the Japanese yen, making trades much more direct and convenient. It also eliminates currency risk.

Common risks that Japanese traders face when they invest in US stocks

Even though Japanese investors who trade US stocks can diversify their portfolio geographically and expose themselves to global market growth, it is not without risk.

Below are the six most significant risks that Japanese traders face when US-stock trading. We will also explain how these risks can be minimised or mitigated.

  • Market risk

As with all trading, investors are faced with market risk. This is the uncertainty of market fluctuations. A trader who speculates share prices will rise will face the risk of share prices falling. Conversely, a trader who speculates share prices will fall will face the risk of share prices rising. Either way, as markets are unpredictable, market risk cannot be eliminated.

Traders can protect their positions is by using stop-loss orders. When they open a position, they can set a stop-loss order to automatically close it if markets turn against them. They can also open smaller positions to begin with, so they will not risk losing huge amounts of money.

  • Liquidity risk

Even though US stock exchanges are highly liquid in the US, they have smaller exposure in Japan. When investing in US stocks, Japanese investors should ensure they have a decent trading volume. This is to ensure stocks bought can be sold efficiently. When there are not enough buyers or sellers on the market, traders may suffer potential losses.

  • Leverage risk

US stocks can be bought and sold via various investment vehicles. These include trading individual stocks, ETFs, options, and futures. Japanese investors may be able to use leverage when trading. Leverage allows investors to open a large position with a fraction of the capital, and it is expressed in ratios, such as 1:10 or 1:25.

For example, a trade with a leverage of 1:10 means that for every 1,000 yen the investor puts down, they can open a position ten times as large. This also means that for every share they can afford to purchase, they can open a position of ten times the number of that.

Leverage depends on the product and instrument traded. Generally speaking, the more stable a market is, the greater the leverage an investor can access. This is because banks do not want their clientele to suffer catastrophic losses.

Gains earned in a leveraged trade are calculated based on the full size of the position. This means that gains are magnified. While this is a good way for investors to make lots of money quickly, leverage also applies to losses incurred. This means that losses may exceed a trader’s initial investment if the markets move strongly against his prediction.

The biggest way to mitigate this risk is not to use leverage at all. This is generally advisable for novice traders. Another way is to, again, set stop-loss orders when opening a trade. Alternatively, investors can start with a smaller leverage ratio.

  • Language barrier

Language barriers for native Japanese investors are generally not a problem when trading US stocks in Japan. This is because the TSE ensures that platforms, company disclosure materials, and trading guides are all available in Japanese. If you are trading with a domestic bank, financial professionals are most likely to serve clientele in Japanese only as well.

Therefore, language barriers may be more present for Japanese investors who are foreign-born or do not speak Japanese so well. In many cases, if you hold a foreign passport, such as US passport, domestic banks may not allow you to open investment accounts with them either. This is the case with Citibank Japan and Fidelity Japan.

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If you are not a fluent Japanese speaker, the best way to mitigate language barriers in Japan is to open an account with a foreign bank with a Japanese presence. Most of these banks operate primarily in English and therefore will be able to assist you in English and Japanese. For example, this includes trading TD Ameritrade and Saxo Bank US Stocks.

  • Stock accessibility

Another risk a Japanese trader may run into is the risk of not being able to buy a US stock at all. Even though the US stock market is abundant with tens of thousands of stock types, there may be a limited number available on the TSE for Japanese investors. This can cause investors to miss out on up-and-coming US stocks with great growth potential.

To mitigate this, Japanese investors should choose a broker who will be able to provide a wide range of US stocks. This varies between financial institutions, so research is vital.

  • Time difference

Finally, the time difference between the US and Japan may create a risk for Japanese investors trading US stocks. In the summer, Japan is 13 hours ahead of the East Coast. This means that if the news were to break during the day in New York, a Japanese investor may be fast asleep and unable to react to stock market shake-ups.

To mitigate this, Japanese investors can set stop-loss orders. Should there be sudden and drastic decreases in the valuation of a stock, the platform will exit a trade automatically. Japanese investors can also prevent keeping positions open overnight.

Conclusion

There are certainly risks that come with trading US stocks in Japan. However, it is a lucrative option and investors can make sizeable profits if trades go their way. By enacting risk management measures, traders can maximize their chances of success trading US stocks.

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