If you haven't heard about the yen carry trade I urge you to learn about it. Basically the idea is that because the Bank of Japan loans yen at close to zero percent, investors are able to take that cash and convert it into something that earns interest, like say US Treasuries at 3%. The yen carry trade has been in effect for about eleven years and people are pretty used to it. At the yen's low levels the carry trade will continue but if the yen were to rise against the dollar then hedge funds would be forced to unwind from their many other positions. This would mean that they would have to sell their US holdings in dollars to buy yen and this would push the value of yen up higher causing more investors to be forced to liquidate. This would also spell the end to the US's ability to sell bonds since they would not be as attractive as they had been. Since trillions of dollars are wrapped up in this carry trade other markets like the US stock market will also feel the impact. As I look at the charts for the US dollar to Japanese Yen it does indeed look like the yen is set to go higher. The other thing I've noticed lately is that although the US stock market has made breathtaking gains lately, the spread between the highs and lows is getting really narrow. I've noticed on smaller scales that when this happens that significant downturns can occur.
More info on the yen carry trade can be found here:
Carry Trade to Unwind: Market Crash AlertBloomberg:
Japan's Boom May Explode YenThe Daily Reckoning:
The 'Justes' and the Good
