It has been a harrowing couple of weeks for currency traders. The US dollar's plunge against the yen caught many horribly off guard. Now, with the greenback retracing, the question is whether the sell-off went too far? The dollar's tumble from 125 yen to 112 wiped out this year's gains in a single stroke. With it went the assumptions of economists everywhere. They figured short-term Japanese interest rates would remain piffling due to a stagnant economy and banking sector left prostrate. Surprise, Japanese growth outlived the temporary consumption boom triggered by a Value Added Tax in April. Export industries have boomed while the belief interest rates will be suppressed to keep banks on life-support have changed. International investors have simply reassessed their view on Japan's economy. In short, they are saying deflation is over and the only way for interest rates is up. By contrast the US economy shows every intention of maintaining its low growth - stable interest rate - trajectory. The rapidity of the dollar correction was the result of investment managers cashing out Japanese bonds. Having got used to yields doing nothing but fall the picture suddenly looked very different. Expectation of rising money market rates saw hedge fund managers quickly square off positions. If the message is correct Japan seems to be emerging from an era of absurdly cheap money. International currency investors always chase high yields. Trade flows may explain long-term movements, but it is short-term interest rate differentials that drive daily activity. So long as investors see Japanese rates rising the flight to yen will inevitably increase. Look around Japan and rising industrial production, increasing office occupancy and a banking system slowly reflating suggest the worst damage from the bubble economy has been digested. If so, the Bank of Japan will have to move fast to push long-term Japanese interest rates higher, lest a nasty bout of inflation ensues. That could quickly kill the dollar's fightback. Moreover, with US consumers still spending, Japanese exports look set for a strong performance. Following a brief interlude, US trade grumbles are sure to resurface. Already, US Treasury Secretary Robert Rubin has fired a salvo over Japan's resurgent trade surplus. Then again there seems little stopping the world's most formidable exporting economy. Japanese car-makers increased their share of the US market by two percentage points to 25 per cent this year while the big three in the US say their share dropped to 72 per cent from 74 per cent. Despite a weaker dollar the relative competitiveness of manufacturers in both countries is expected to remain unchanged for at least six months. Of course, movements in the dollar/yen rate have profound implications for markets around the world. Nowhere more than in Asia, which counts both economies as important trading partners. As always such a shift presents mixed blessings. This year's plunge in the yen produced fears that Japanese firms would crank up moth-balled domestic factories rather than invest in regional markets where currencies are tethered to the greenback. A stronger yen will make Asian exporters more competitive while those dependent on Japanese components and raw materials will face rising import costs. Countries like Malaysia, effectively a downstream Japanese processing centre, are likely to be worst affected while services-dominated Hong Kong should see less impact. A strengthening yen will hurt countries with large yen-denominated debt such as Indonesia and the Philippines. Similarly, corporations with an urge to issue US dollar bonds will find conditions difficult as investors eschew dollar-based assets. This might all sound like financial swings and roundabouts. But if Japan is emerging from five years of cheap money the impact is likely to be felt in capital markets around the world.