Perhaps there is a free lunch after all, if you are willing to sit in front of a steamroller to eat it. The "carry trade" - borrowing in a low-interest currency, especially the yen, and investing in higher-yielding assets - has been delivering some tasty returns. It looks likely to continue to do so, unless of course the steamroller arrives.

The carry traders employ a variety of financial bells and whistles, but the underlying bet is simple enough. You take out a cheap loan in yen, invest it in a higher-yielding currency (the US dollar for wimps, the Brazilian real or New Zealand dollar for the real men), pocket the interest payments as they come in, convert the principal back to yen and repay the loan. Since you invested little of your own money to begin with, you can realise splendid returns. Of course, should the yen appreciate sharply, you won't be able to repay the loan, a problem both for you and for the creditor.

Wednesday's doubling of Japanese interest rates to a not-entirely-dizzying 0.5 per cent was accompanied by suggestions from the Bank of Japan that this would be the last rate rise for some time. This encouraged the traders: the free lunch is almost as delicious and the steamroller as far away as ever.

The arrival of the steamroller, that is, the unravelling of the carry trade, is one of the most widely heralded financial crises in history. If it happens it will certainly crush a few victims. It would be possible for the trade to unwind gently, if the yen slowly appreciated or if Japanese rates rose higher.

But it is easy to entertain more unpleasant scenarios. Some nervousness in emerging markets, a spike in volatility, a flight to cover exposed positions and the yen appreciates 10 per cent; some modestly bullish news from Tokyo and the yen appreciates another 10 per cent. If you had parlayed $200m of assets into a billion-dollar yen swap, congratulations: you just lost everything. If you invested it in risky assets that simultaneously slumped, which is not unlikely, you lost everything twice over. This story requires no imagination to tell, because it is recent history: in October 1998, carry traders were undone when the yen gained around 15 per cent against the dollar in just two days, the culmination of several weeks of appreciation.

None of this is news to the traders, who are well aware of the risks and perhaps of the history as well. Yet they tend to trade other people's money, a situation that often encourages excessive risk-taking. If a hedge fund wins, it wins big. If it loses, it keeps the management fee. Caveat investor.

Then there is the voguish practice of financing European mortgages with Swiss or Japanese currency. The loan may be cheap but a short, sharp appreciation will leave homebuyers in trouble faster than you can say "negative equity". Much more common is the ordinary Japanese family with savings held in foreign currencies. That is not surprising, given the returns enjoyed abroad. But in neither case should we assume that small-scale investors understand the risks they are running.

This domestic exposure should be making the Japanese authorities nervous. So, too, should the Y7trn (almost $60bn) that foreign banks have borrowed from Japanese banks. If the yen appreciates, will those loans go bad? Nobody knows how large the carry trade is, nor, thanks to derivatives and hedged positions, do we know who is holding the risk. But if the steamroller arrives tomorrow, not everyone will scramble out of the way.