The e-FX market in Tokyo has grown steadily over the past 12 years, since the first e-FX survey was published by the Bank of International Settlements, back in 2013. Globally, e-FX accounts for nearly 60% of the $7.5trn daily volume in the FX market, as per the 2022 report.
In Tokyo, the ratio has risen from 20% in 2006 to around 50% in recent years, which is slightly below the global average. However, the ratio is significantly higher (70%) for spot and forward transactions.
The fact that the e-FX ratio is slightly lower than the global average can be attributed to several factors, according to a report from the Bank of Japan (BoJ) published in March 2025. These include the differences in attitude between Japanese and foreign financial institutions but also the composition of market participants.
A comparison of trading volume by market participant for spot and forward transactions in the Tokyo market shows a larger share for corporations and a much smaller share for hedge funds when compared to the global market.
Corporate participants
According to the aforementioned report, Electronic Foreign Exchange Trading (e-FX): Developments in and implications for the Tokyo FX Market Financial Markets Department, the large share of corporate participants is one of the factors pushing down the overall e-FX ratio, given that the preference for e-FX is not uniform among these participants.
In interviews conducted by the central bank, corporations that preferred voice trading stated that they valued the relationship they have with their main bank when selecting an FX market maker and have little need to compare multiple prices.
In addition, the small volume and low frequency of their FX transactions means it is harder to make the case for switching to e-FX, especially given that some corporations cite the opportunity to hear the financial market information offered by FX dealers in association with the FX transactions as an advantage of voice trading.
That said, there has been some movement among the corporates from voice trading to e-FX, partly due to the requirement to show best execution and partly due to a recognition of the efficiency gains and labour savings that come with electronic trading.
Another factor is the number of instances when e-FX was implemented as part of the company’s digital experience (DX) improvement projects. “If these trends continue, it can be expected that e-FX will be more widely adopted by Japanese corporations”, states the report.
Adoption of e-FX is also much higher among the FX aggregators that manage retail FX margin trading – participants that are “highly compatible with e-FX in that they accept orders from retail investors over the internet and are sensitive to latency” states the report. Consequently, the recent growth in retail FX trading in Japan is likely to contribute to the expansion of e-FX in Japan.
The report also looks at the share of spot transactions by venue and finds that the Tokyo market is dominated by transactions through single dealer platforms, largely through interdealer market transactions and FX retail aggregators.
“One of the characteristics of the Tokyo market is that many venues focus on attracting FX retail aggregators, and the trend for FX retail aggregators is significant when monitoring the e-FX trend,” states the report.
While the advent of e-FX has given customers more opportunities to trade at better prices and with less market impact, it has also created a more fragmented market with the expansion of secondary venues, which makes it more difficult to monitor market trends, states the report.
The development of e-FX also has an impact on the market presence of individual countries due to the location of the e-FX infrastructure, according to BoJ. “As the e-FX infrastructure advances internationally, the presence of the Tokyo market as a financial centre may be affected, involving an outflow of FX transactions to other financial centres. Careful monitoring of e-FX is important to follow trends in FX trading and changes in market structure.”
“There is a recognition of the benefits of e-FX in terms of transaction costs and price discovery. However, there are some nuances worth noting,”
Vignesh Srinivasan
Relative maturity
The fundamentals of Japan’s e-FX market are not markedly different from other jurisdictions, says Vignesh Srinivasan, Senior Research Manager at Crisil Coalition Greenwich. “There is a recognition of the benefits of e-FX in terms of transaction costs and price discovery. However, there are some nuances worth noting,” he states.
From a flow and trading volume perspective, there are some large retail aggregators that rely heavily on the use of APIs. While multi-dealer and single dealer platforms are still the main liquidity venues, APIs are more prevalent than in other FX markets. Hedge funds are also keen users of APIs but there are relatively few trading in Japan’s onshore FX market.
In terms of liquidity provision and fragmentation, the fact that Japan trades mostly G10 currencies and not emerging market currencies, means that liquidity is relatively buoyant and with limited fragmentation. In addition, institutional participants are increasing their MDP adoption which is improving price discovery.
However, according to Srinivasan, while adoption of tools like transaction costs analysis (TCA) and algos are increasing, Japan still lags other developed markets. “At this point, the use of TCA in Japan and Asia Pacific is not as sophisticated as other markets and that is to do with the relative maturity of the market. It is a similar thing with the use of algos where adoption is not quite as big in Japan as elsewhere,” says Srinivasan. “But, given the recognition of the benefits of e-FX and the regulatory support for more adoption of electronic trading, I believe this will change over time,” he states.
“People want the efficiency and transparency that comes with electronic trading, but they also want more exotic instruments and more firms offering this.”
Kenneth Ho
Market diversity
While there has been a modest uptick in trading activity in Japan’s FX market over the last year, there have also been large spikes in activity during moments of volatility, such as the introduction of tariffs. The more significant change has been in the type of market participants, says Kenneth Ho, global head of e-FX sales at MUFG.
“The currency markets in Japan have always been active, especially in the retail FX space,” says Ho. “More recently, the market in Japan has become more diverse. There has been a sizeable rise in the number of buy-side participants – hedge funds, asset managers and corporates. Hedge funds in Japan have mostly focused on IR trading but are increasingly looking to trade in the currency markets.”
Traditionally, Japan’s FX market has been dominated by retail flow and margin traders, says Ho. “And a lot of this market is already electronic. FX liquidity aggregation has long been a fixture and the spreads have always been competitive. But with more client segments participating in the market, there has been greater focus on the need for more workflow solutions. So, as an FX provider, we are focused on solutions that will match our clients’ needs and demands.”
In terms of execution strategies, there has been a greater take-up of algos and a greater awareness of market impact, even among the corporates, says Ho. “There has been a shift of focus from just seeking for the tightest spreads to looking at execution more holistically by considering actual transaction cost. For example, there is a lot more discussion around TCA and the quality of liquidity. 10 – 15 years ago, conversations with clients was mostly about spreads but now there is a focus on rejection rates, market impact and other factors. This has come from the different participants coming into the market and wanting to see the same kind of qualities and features that they see in other markets,” says Ho.
Japan has always been unique in terms of its systems and market infrastructure, and that has posed a challenge in implementing standard workflow solutions that are used outside Japan says Ho. “However, given the importance of this market, we are seeing significant investment recently in solutions to meet the needs of domestic participants. In terms of liquidity provision, we will likely see consolidation,” says Ho. “In the past, people included as many LPs as they could in their aggregators That will change. There is more focus on the quality not quantity of liquidity. Market participants in Japan are quite sensitive to the quality of liquidity provision and are using data to ascertain execution quality. Despite this consolidation which will see larger liquidity providers, there will still be an opportunity for niche players that have specific strength in some certain areas or currencies.”
Electronic option trading demand is also increasing in Japan, says Ho. “People want the efficiency and transparency that comes with electronic trading, but they also want more exotic instruments and more firms offering this.”
Overall, Ho is confident that Japan’s e-FX market will continue to develop and grow. “I am definitely optimistic. MUFG’s strategy has always been client-centric and it is about building relationships with clients with a focus on delivering solutions to make workflows as seamless as possible. We are a large commercial bank with a broad range of clients so it is important for us to understand their diverse needs and provide innovative solutions that address them. Japan is one of the largest FX markets in the world and e-FX will stay central to the continued growth in this market,” says Ho.
“At MUFG, we committed to this space and we have been growing – hiring people and developing the business globally. We operate in 40 markets worldwide, providing access to our clients through our network. e-FX is a focus area for us and will continue to be a key pillar of growth for our FX business,” he adds.
“According to research by a major Japanese broker, 70% of retail clients use smartphones for trading. Providers are therefore focusing on the UI/UX of their smartphone applications.”
Hiroaki Nagakura
The evolution of retail FX in Japan
Japan’s retail FX market is arguably not as robust as is it has been in the recent past but what factors are influencing its growth and evolution? According to Hiroaki Nagakura, Head of Prime Services – Japan at 26 Degrees, competition in the market and the popularity of FX trading should nevertheless ensure that volumes remain high.
“It can be said that the Japanese retail FX market has entered a maturity phase after a period of strong growth, following a shakeout of FX brokers due to intensified competition in the last ten years,” says Nagakura. “Having said that, FX trading remains a popular financial product, due to the speculative aspect of highly leveraged trading, and the investment aspect of earning swap points by trading high interest-rate currencies. For this reason, I believe trading volumes in FX will continue to be high going forward.”
FX brokers will therefore have an important role to play in maintaining healthy trading activity. “To support these volumes, brokers are increasingly providing user friendly trading infrastructure such as automatic stop-loss functions and smartphone applications that allow 24h monitoring of margin and positions,” says Nagakura. “Furthermore, in terms of service, competition among brokers has led to tighter spreads and improved swap points, allowing clients to trade in a more favorable environment.”
Brokers and other institutional firms in Japan are also investing in technology and trading services demanded by retail and private investors, which includes the use of smartphones, says Nagakura. “According to research by a major Japanese broker, 70% of retail clients use smartphones for trading. Providers are therefore focusing on the UI/UX of their smartphone applications. Going forward, in pursuit of further differentiation, I believe that trading and margin management using AI, as well as algorithmic trading, will be introduced.”
Brokers are also having to cater for the growing number of high-performance trading firms and hedge funds active in the Japanese FX market. “High performance trading firms in Japan are seeking speed, transparency, and flexibility equivalent to that offered by overseas prime brokerage services,” says Nagakura.
To sum up, the following are the types of technologies and trading services particularly in demand by these regional firms:
- Low-latency, high-throughput trading infrastructure
- Margin trading using not only cash deposits but also securities collateral and letters of guarantee
- Integrated risk and margin management across multiple asset classes
- An incident free trading infrastructure, and prompt and appropriate incident management in the event of an incident.
Conclusion
Japan remains an important centre for many FX players but the recent BoJ report has flagged the relative decline of the Tokyo FX market and the significant challenges it faces in catching up with the rapid growth in e-FX that has been taking place in other centres around the world. Nevertheless efforts are now underway to automate and modernise so we should expect to see some rapid developments in the Japanese electronic FX market before too long.
