Japan's ruling party is moving to ease one of the world's strictest cryptocurrency leverage trading restrictions, arguing that the current 2x cap stifles market activity and price discovery. The proposal marks a significant shift in how Tokyo regulates digital assets, even as it simultaneously strengthens oversight through new financial product classifications and enhanced penalties for unlicensed operators.

Why Is Japan Reconsidering Its Crypto Leverage Limits?

Seiji Kihara, who heads the Liberal Democratic Party's Next Generation AI and On-Chain Finance Project Team, argued during a financial conference in Tokyo on July 14 that Japan's existing two-times leverage cap is "too strict" and limits market activity. Leverage trading allows investors to borrow funds against collateral in their accounts, enabling them to control positions larger than their initial capital. Japan currently enforces one of the strictest leverage caps among major crypto markets, and Kihara contended that relaxing this restriction would support the liquidity and price discovery mechanisms that healthy markets require.

The push to ease leverage rules comes as part of Japan's broader regulatory overhaul, which has accelerated in recent months. Earlier this month, Japan enacted amendments to the Financial Instruments and Exchange Act that reclassify cryptocurrencies as financial products rather than treating them primarily as payment instruments. This shift brings crypto regulation closer to traditional financial markets and creates the legal foundation for several additional reforms.

What Other Crypto Reforms Is Japan Implementing Alongside Leverage Changes?

Japan's regulatory framework is expanding significantly beyond leverage limits. The recent legislative amendments introduce insider trading rules for crypto transactions, require annual disclosures from issuers of certain crypto assets, and substantially increase penalties for businesses operating without proper registration. The maximum prison sentence for operating an unregistered crypto business will rise from three years to ten years, while the maximum fine will increase from 3 million yen to 10 million yen.

The amended law also establishes the legal basis for separate taxation of crypto gains at an effective rate of approximately 20 percent, together with a three-year loss carry-forward deduction. These tax changes are expected to take effect in January 2028, as enforcement is scheduled during the 2027 fiscal year. Additionally, the legislative changes have advanced Japan's plans for domestic cryptocurrency exchange-traded funds (ETFs). The Financial Services Agency is preparing revisions to investment trust rules that would allow ETFs and investment trusts to hold crypto assets directly, with the first domestic Bitcoin ETF potentially launching as early as 2028.

• Leverage Expansion: Lawmakers are considering raising the current 2x leverage cap to improve market liquidity and price discovery mechanisms for crypto traders.
• Financial Product Classification: Cryptocurrencies are now classified as financial products under updated financial laws, bringing them under stricter oversight similar to traditional securities.
• Enhanced Penalties: Prison sentences for unlicensed crypto operations increase from three to ten years, and maximum fines rise from 3 million yen to 10 million yen.
• Tax Framework: A separate 20 percent effective tax rate on crypto gains with three-year loss carry-forward deductions is set to take effect in January 2028.
• Bitcoin ETF Pipeline: The Financial Services Agency is preparing rules that could enable domestic Bitcoin ETFs to launch as early as 2028.

Several large Japanese financial institutions have already begun preparing crypto investment products ahead of these rule changes. SBI Securities, Rakuten Securities, Nomura, Daiwa, Asset Management One, and firms affiliated with SMBC are studying crypto investment products that could enter the market once regulators complete the framework. Beyond spot Bitcoin ETFs, SBI Global Asset Management has explored funds focused on highly liquid cryptocurrencies including Bitcoin and Ethereum, while Osaka Exchange has discussed launching Bitcoin futures if spot ETFs become legal.

How Does Japan's Approach Compare to Global Crypto Regulation Trends?

Japan's regulatory strategy reflects a middle path between light-touch self-certification and strict oversight. While the country is easing leverage restrictions to encourage market participation, it is simultaneously strengthening enforcement mechanisms and bringing crypto under the same regulatory umbrella as traditional financial products. This contrasts with some jurisdictions that have pursued either minimal regulation or comprehensive frameworks like Europe's Markets in Crypto-Assets Regulation (MiCA), which mandates strict corporate governance, reserve backing requirements, and mandatory civil liability for whitepaper errors.

The leverage discussion also fits within Japan's broader effort to develop its digital asset sector as part of national innovation strategy. Prime Minister Sanae Takaichi told attendees at WebX 2026 that Web3 forms part of Japan's national innovation strategy rather than serving as a standalone cryptocurrency initiative. Her remarks focused on encouraging collaboration between startups, investors, and technology companies, although they did not include new funding commitments or immediate regulatory announcements.

For now, Kihara's project team remains focused on preparing policy changes designed to improve market liquidity and attract cryptocurrency trading activity back to Japan without announcing a specific timetable for introducing revised rules. The proposal represents a calculated bet that easing leverage restrictions will strengthen Japan's position as a crypto market hub while the country's enhanced oversight mechanisms protect consumers from fraud and misconduct.