The investigation of a Japanese housewife who made 400 million yen (£1.7 million) day-trading on foreign exchange markets has exposed a potentially massive tax evasion scam by retail currency investors.

Her alleged fraud has also highlighted what institutional currency investors call the “unstoppable power” wielded by hundreds of thousands of players of the forex market.

The woman, 59, was one of a growing number of Japanese “margin forex” traders who leverage initial collateral as much as 20 times to finance big currency bets. The market, which has surged since a 2005 law made trading easier, is stoked by more than 100 small forex trading houses pitched at gamblers and bored housewives.

Analysts said the $3 trillion (£1.52 trillion) of annual currency trading by retail investors in Japan may be the main reason for the persistent weakness of the yen — a boon to Japan’s exporters in recent months.

The Tokyo woman, who used an inheritance from her mother to finance a complicated series of currency and commodity swaps, is understood to have declared as income only a fraction of what she made. Although her husband said that her failure to declare the profits had been because she did not fully understand tax law, investigators say that her forex earnings had been put into accounts under other family members’ names.

The woman, who cannot be named and now faces possible criminal charges, is one of hundreds of thousands of Japanese housewives, students and retired salarymen who play the risky forex markets for quick profits rather than betting on the “lottery” of Japan’s equity market. Many over-65s trade currencies because their Post Office savings have for nearly a decade been earning virtually no interest.

Officials at the Tokyo Tax Bureau suspect a vast number of Japanese investors, many conducting untrackable over-the-counter deals, are failing to declare billions of yen in profits. Using the limited data available, its investigators estimate that, in the first half of 2006, about 100 individual investors failed to report about 2 billion yen in profits.The Tokyo Financial Exchange says that, as only 10 per cent of forex trades are reported to the Tax Bureau, the true scale of income tax evasion could be enormous.

But economists are more concerned by the net effect margin investing is having on the yen. Its weakness is driven by the popularity among margin forex traders of the New Zealand, Australian and US dollars — whose countries have substantial commodity-related moves afoot or where overnight interest rates are far higher than the 0.5 per cent in Japan. Investors heavily sell their yen against those currencies, continually suppressing the yen even as wider economic forces would naturally be pushing it higher.

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