Ask yourself why Japanese savers have reflexively sent large percentages of their savings overseas. They are in search of higher yields, of course, since domestic rates are low and have been very low for years. That is starting to change, however, as the ambitious economic agenda of the DPJ-led government sparks fears in the market for Japanese Government Bonds (JGBs) which have caused a recent yield spike.

If Japanese yields continue to rise, demand for currencies could be crimped at the margin as Japanese domestic accept “risk-free” returns rather than reaching offshore for yield . Pairs like AUD/JPY and NZD/JPY, among the most crowded of JPY-funded carry trades, could be the first to feel the pinch. These pairs have enormous upward momentum on their side at the moment, but once that momentum wanes, a shift in thinking may occur. Nothing sharpens the mind like negative price action, I always say…