Margin trading in Japanese stocks drastically reduces after the market meltdown

Trading on borrowed money, or margin trading, declined drastically in Japan's stock market last week as investors were compelled to abandon stocks amid the Nikkei index's steepest drop in over 40 years.

Margin trading, which involves borrowing money from brokerages to increase bets in the stock market, is popular among Japanese retail investors.

According to exchange data, margin trading accounts for around 70% of total retail trading value.

The value of shares bought on margin declined by 907 billion yen ($6.15 billion) to 4 trillion yen in the week ended August 9, down from 4.87 trillion yen the previous week, according to Japan Exchange Group, which operates the Tokyo Stock Exchange.

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

The Nikkei fell 12.4% on August 5 in the market's worst single-day fall since the 1987 Black Monday disaster, but recovered 10% the next day. By August 5, the index had fallen by up to 27% from its July peak of more than 42,000.

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

The steep reduction in shares bought on margin shows that leveraged retail traders, who account for approximately 20% of the value in Japan's brokerage trading, were burned that week and are unlikely to return for some time.

Margin trading allows investors to increase their trading volumes, but also exacerbates losses when the market falls by compelling investors to sell shares.

According to strategists, margin calls exacerbated the Nikkei's slump on Monday.