The dollar's decline since U.S. economic data started weakening in June has taken the yen within reach of highs last seen 15 years ago. The dollar was trading at 85.5 yen early Wednesday, its highest level this year and down 8% from its peak six weeks ago.

    The latest dollar dip comes as Federal Reserve officials consider another round of asset purchases to offset spending cuts by cash-strapped states. The yield on the 10-year Treasury note has tumbled below 3% and the yield on the two-year note has slipped to an all-time low just above 0.5%, as investors push back their expectations for a recovery in interest rates and economic activity.

    The plunge in U.S. rates has renewed talk about the carry trade moving into dollars. In the carry trade, traders borrow low-yielding currencies such as the dollar and yen, sell them and invest the proceeds in higher-yielding assets elsewhere.

    The resumption of the carry trade makes betting against the dollar look like a sure thing. When traders are ready to take on more risk, by buying stocks, for instance, they fund those trades by selling the dollar. When they are looking to flee risk, they do so by buying the yen, further pressuring the dollar.

    The yen's return to levels seen in the mid-1990s has market watchers looking for a possible intervention by the Bank of Japan. The bank could buy dollars to limit the yen's rise, easing pressure on the country's exchange rate-sensitive export sector.

    But the Japanese haven't intervened in the foreign exchange market for years, and they might prefer to stand aside -- because by intervening they could add to a massive dollar position that has been anything but profitable.

    Benn Steil, a senior fellow at the Council on Foreign Relations, notes in a recent op-ed piece that Japan has already paid a hefty price for the distinction of being the second-biggest foreign holder of dollars after China, with $1 trillion or so stashed away mostly in Treasurys. He says the Japanese acquired almost half that sum in their last attempt to intervene in the currency market, in 2004.

    Since the financial crisis started in 2007, Japan's dollar reserves have climbed by $100 billion or so, thanks to a persistent trade surplus with the United States. But to say the Japanese are getting diminishing returns on these holdings is an understatement.

    Since June 2007, the dollar has lost nearly a third of its value against the yen -- leaving the Bank of Japan sitting on a pile of dollars that are worth significantly less now than they were three years ago. Steil estimates the decline at 3.5% of Japan's economic output.

    For comparison's sake, an equivalent paper loss at the Federal Reserve would run near $500 billion. That's not chump change even in the age of bailouts.

    What's more, the declining value of foreign reserves adds to Japan's already considerable debt problem, as the value of the foreign asset erodes while the local currency liabilities persist. "The local losses on Japan's reserves since 2007 contributed more to the increase in net debt than did the government deficits in fiscal year 2007 or 2008," Steil writes.

    While the rise in the yen doesn't seem worrisome now, Steil notes that the cost to Japan and China of holding large dollar reserves is yet another risk factor for a slowly recuperating global economy. This is the downside of dollar hegemony, he contends.

    "The result is periodic crises – when countries have too few dollars, as during the Asian financial crisis, or when they suck in far too many of them, as they appear to be doing now."