SINGAPORE (Dow Jones)--The Japanese currency has taken another leg higher in Asia Wednesday on comments suggesting further dark days for the yen-funded carry trade, but there is no need to get swept away yet.

Japan's banking minister, Yoshimi Watanabe, has startled markets a bit with what would appear to be a fairly benign comment - that there's always the chance of further carry trade unwinding.

As Westpac Banking Corp.'s Sean Callow puts it, "I guess the fear is someone in Watanabe's position might be seeing signs of outstanding yen carry positions that had on some measures seemed roughly squared."

This has taken the dollar down to around Y115.74 and the euro to Y157.28, with corresponding weakness in the higher-yielding New Zealand and Australian dollars.

While things have calmed down a bit in the recent weeks, there remains the risk of further bouts of global market volatility, especially as the commercial paper market is under strain. In a risk-averse environment, the Japanese currency tends to fare well.

The argument goes that a rise in the yen prompts Japanese individuals to bring funds back from higher-yielding investments in places like Australia and New Zealand. A higher yen makes the carry trade less appealing as it eats into the relative yield advantage of parking funds offshore.

The carry trade is also a murky beast, which creates an environment ripe for rumor and mystique. It is difficult to get any real idea of the magnitude of it. Japan officials have admitted as much. So it's hard to tell how much unwinding may then be occurring.

Still, for all the chatter about hordes of nervous households in Japan bailing out of foreign assets and into bank deposits or Japanese equities, so far the market gyrations don't seem to have produced such a scenario. Periodic volatility may continue but as the aftershocks become smaller and smaller, carry-trade demand should remain.

Macquarie Research's Richard Jerram notes this argument has history on its side.

Looking at investment trust flows during previous episodes of yen strength in 2003-2004, Jerram says there is no evidence this had an impact on flows into foreign interest-bearing investment trusts.

"There continues to be talk about unwinding of yen carry trades," he said in a note to investors. "Just as estimates of the magnitude of the positions were elusive, the talk now must be taken with the proverbial grain of salt."

Jerram also disputes the idea Japanese investors would want to put their money back into local equities, anyway, which carry their own risk. "It seems unlikely that people would sell a foreign bond fund and put the proceeds into domestic equities," he says.

Some of the skepticism is shared by Marc Chandler at Brown Brothers Harriman.

The recent rise in the yen is not so much a function of unwinding of carry trades by Japan investors, but rather, he says, speculators at the Chicago Mercantile Exchange switching their positions to go long the yen.

Noncommercial positions have turned long yen, though modestly so. Real money accounts have also been buying the yen as foreign investors have bought Japanese bonds.

Regardless of where the yen gains have come from, they may not continue. As noted before, volatility is likely to become less influential in coming months as investors adopt a more sanguine view of the troubles in the U.S. housing market.

Also, as Chandler notes, the October start of the second half of the Japanese fiscal year isn't far off. That could bring with it fresh demand from Japanese investors for foreign assets.

There is also no immediate risk of a Bank of Japan rate hike to make local assets more appealing from a yield perspective.

Credit Suisse's market pricing shows just a 10% chance of a 25 basis point rate hike at the September 19 meeting, with only 29 basis points of hikes priced in over the next 12 months. Hardly a reason to put money in the bank in Japan.

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