^_^ is the Japanese equivalent of the emoticon :). It borrows its form from the insipid little curved eyes that anime and manga characters develop when they're happy. While many torendii people in Japan use these kind of emotes, the only people who really use them widely in Latin-based text are anime fans.

Japanese emoticons tend to follow ^_^'s right side up format, mainly because the wide variety of extra characters available on Japanese codepages (maru, batsu, kanji, etc.) make it possible to draw all sorts of interesting shapes that can't be made in plain ASCII. One example of an unorthodox JIS emoticon:(◎々◎) (if you can't read it, try it on a Unicode-compatible browser). Check out the Japanese Smileys node for several that can be rendered on Latin codepages.

The opposite of ^_^ is -_- ... which can be intensified by lengthening the underscore that forms its mouth, like this: -_____-