As Japan enters a six-day New Year break, a sense of anxiety over the possibility of another flash crash is gripping currency traders.

The Financial Futures Association of Japan has already warned of market instability as the holidays create a liquidity vacuum. Meanwhile, importers are preparing to deal with a potential repeat of the turmoil that took place on Jan 3 this year, when the yen gyrated wildly and surged against its peers.

One red flag to watch for this time is the Turkish lira.

Japan's retail investors speculate on a number of currencies, and are currently most bullish on the lira, according to data from the Tokyo Financial Exchange Inc. At the same time, Turkey's currency has slumped more than 11 per cent against the yen this year, opening up the prospect of forced liquidation of margin positions if losses increase.

"Caution is needed with regard to the Turkish lira against the yen," said Takuya Kanda, general manager at Gaitame.com Research Institute Ltd in Tokyo.

"Any market shock could spur stop-loss selling on retail investors' bloated lira-yen positions, which may see a broader surge in the yen."

Retail traders take a contrarian view and go into the market when prices dip, typically having a moderating effect on currency moves, according to research from Japan's central bank. But when their bets go wrong, the results can be dramatic.

That's what happened in the early hours of Thursday, Jan 3, when the sell-off in the lira and the Australian dollar against the yen triggered an automatic liquidation of investors' loss-making positions. Algorithmic programs and the absence of Japanese banks only exacerbated currency moves as the yen soared almost 8 per cent against the Aussie and 10 per cent versus the lira within minutes.

With banks being shut from Tuesday until Jan 5, investors may not be able to respond to margin calls and risk seeing forced liquidation, the Financial Futures Association warned in a statement this month.