Hedge funds may not be the only ones playing the carry trade as it unwinds, and investors may be surprised where it bites, says Merrill Lynch in a research note.

“The yen carry trade basically involves borrowing at low interest rates in Japanese Yen and investing in higher returning assets somewhere around the world,” Merrill explains. It notes that two groups of investors are generally associated with these sorts of trades: hedge funds, and Japanese citizens looking for higher returns on their savings.

But, it notes that there’s increasing evidence that a third group has been active in yen carry trades: corporations. “It seems as though corporations have used the yen carry trade as a cheap source of short-term financing,” it says.

“So far, it is quite difficult to pinpoint which corporations have been using such financing methods or what the impact on their financing costs would be if the Yen appreciated and/or Japanese interest rates rose,” Merrill allows.

However, it cautions, “The tightening of global credit conditions and its implications still seem to be misunderstood or underestimated by most investors.”

“We continue to expect financial market volatility to increase, and risk premia to rise accordingly, as global credit conditions tighten,” it concludes. “Credit has an insidious way of boosting growth, and its effects invariably appear in places that investors least expect. Corporate balance sheets might be one of those places.”