Here is an article about the Yen Carry Trade that predicts that the Bank Of Japan will increase interest rates very soon because of the improving Japanese economy, and that by moving interest rates off of zero, this could cause an unwinding of the Carry Trade. This is the facility by which banks in Japan can borrow money from the BoJ for zero percent and then effectively get a 4% gain by getting US treasuries.
"The BOJ literally acts like a central bank of the
world through the Yen carry trade, supplying liquidity that finds its
way into markets everywhere."
According to the article when the BoJ last increased interest rates to control the heating of the Japanese economy it led to a fast appreciation of the Yen (by 20%) and then directly to the failure of Long Term Capital which in turn led to the a global crash.
If this occurs again, what will the implications be? Particularly at a time when the US is carrying unprecendented debt.
