One thing I've learned from working in the foreign exchange market is to watch what the Japanese are doing. Why? They are very wise and patient investors who are usually right over time.

The Japanese are very different from most currency traders, especially the average American currency trader, who tend to be short term in nature. Japanese traders will hold positions from a few months to a year or so. They use a very small amount of the leverage, and have well-capitalized accounts they can hold on to while the bigger swings happen, and as they await their payout in months to a year.

Why are the Japanese so interested in foreign currencies? Well, if your currency only earned a half percent, then you too would be interested in what other currencies in the world may reap.

This is exactly what the Japanese have done.

They are very astute investors. They put up to 35 percent of their annual income into savings and investments. Compare that to Americans who outspend their income each year by 1 percent to 2 percent.

Since their currency earns such a paltry amount, the Japanese look to other stable nations with high debt ratings to invest in. After all, most other countries earn 2 percent to 8 percent on their money.

These Japanese investors really get excited when they feel a country is about to start raising its interest rates. The Japanese will trade that currency against their own currency and enjoy the daily interest that they take in from the investment.

The nice thing about an interest rate hiking cycle is that it makes the interest rate differential between the two countries increase. This reaps investors more and more daily profits over time. In currencies, the rollover interest is earned seven days a week, not just on business days.

Recently, Japanese investors have smelled something brewing again. How do I know? By the sharp increase in foreign exchange margin trading accounts among the Japanese investors.

These trading accounts have risen a full 92 percent in their last fiscal year to 1.27 million accounts. Now that's huge in such a short time. There is an estimated $6.3 billion in those accounts.

What do they smell brewing? Well, they watch the U.S. dollar to the Japanese yen the most (USD/JPY). They watch this pair closely and get excited when they think a U.S. interest rate hiking cycle is about to begin.

And with the USD/JPY pair trading at historically low levels, these traders are starting to pile into the U.S. dollar vs. the Japanese yen even now.

Now some may say that the rate hike cycle isn't upon us just yet, and I'd tend to agree. The Federal Reserve typically doesn't make rate changes around election time, so many don't expect rate increases until after the November elections.

So, the earliest would be at the December meeting of the Federal Open Market Committee (FOMC), but many economists suspect that the first rate hike could come in the first quarter of 2009.

Japanese investors don't want to miss this really low exchange rate until then, so they are hopping in now and patiently earning daily interest while they wait for the U.S. rate hike cycle to start.

How widespread is this phenomenon? Even Japanese housewives invest in foreign currencies in droves. They are shrewd investors also and are always looking for more ways to get a better return on their money.

And it has turned out to be a very lucrative way for many of them to make money. You see, they don't invest like the average American does in foreign currencies. The average American trades short term, isn't patient, is over-leveraged, and undercapitalized.

No, these wise Japanese investors expect wide swings against them in the short term along the way. That's why they have well-capitalized accounts in proportion to the amount of currency they trade.

I must say, this is one of the smartest ways to trade currencies.

It doesn't produce an instant result like many Americans prefer, but it usually ends up becoming a much larger return in the end than the typical American currency investor could have ever returned, due to their lack of patience and capitalization.

Back to these accounts for a moment. It's estimated that these accounts will grow to 1.79 million accounts by next March alone, and that the assets held in them will be an estimated $8.24 billion. So this party is just getting started.

I learned a long time ago to side with these guys and to go in the direction of (and not against) them. And they have been right so far.

The yen has fallen more than 3 percent against the dollar this quarter alone. So these guys are racking up appreciation on their investment plus daily interest.

One more point that may lead to their ultimate success: the Japanese economy may go into a recession this year. If it does, then a lower yen and lower interest rates will help them.

This will only help ensure that their carry trade on the USD/JPY currency pair flourishes even more.

Here's something else to consider: Even though oil has come down some in the near term from its record highs, the prices are still killing the Japanese economy. They still have to import more than 95 percent of their oil at whatever the going rate is at the time.

So expect the U.S. dollar to continue to climb overall against the Japanese yen throughout the rest of 2008 and all of 2009 as the U.S interest rate hike cycle gets under way.