(Bloomberg) -- One of the most popular trades in foreign-exchange markets is losing its luster as the Bank of Japan signals the end of its negative interest rate policy.

The appeal of using borrowed yen to buy securities denominated in higher-yielding currencies, known as a carry trade, is in flux after remarks this week from the BOJ’s Hajime Takata hinted at a potential policy change. That’s giving pause to money managers, especially now that leveraged funds have boosted their bets against the yen to the most in more than six years.

“The first move — and how they signal the pathway — is very important,” said Salman Ahmed, Fidelity International’s global head of macro and strategic asset allocation. “If you have a negative shock, then the unwind can be quite vicious because there’s so much positioning on that trade.”

Read More: BOJ Signals Rate Hike Is Getting Closer, Sparking Yen Rally 

As speculation builds that the BOJ will change its path, so does the potential for the yen to strengthen. After Takata said that Japan’s price target was “in sight,” the currency jumped. The yen climbed nearly 1% to 149.21 per dollar Thursday, its strongest level in more than two weeks, before paring the advance.

Thursday’s yen gains are emblematic of the risk carry traders — and yen bears — are taking: Investors suddenly fleeing their short positions stands to exacerbate a sharp move higher in the yen.

Leveraged funds have turned the most bearish on the yen since early 2018, according to data from the Commodity Futures Trading Commission as of Feb. 27. 

“There’s just not enough juice left in the squeeze,” said Peter Vassallo, a portfolio manager at BNP Asset Management. “I don’t like it mainly because there’s this left-tail risk of when people do start to unwind, there could be a big rush to the exit.”

For carry traders, it’s a balancing act. Top BOJ officials in the past have said it’s hard to see the bank raising its policy rate continuously and rapidly even after the negative interest rate is ended. Plus, the yen has been underperforming its Group-of-10 currency peers for more than a year, so it’ll likely take more than a rate hike to wipe out its carry appeal altogether.

That leaves investors to weigh the carry strategy — which flourishes in a low-volatility environment — while interest-rate gaps are still present. Using the Swiss franc to fund the wagers has emerged as one strategy this year as slowing Swiss inflation has curbed the need for the central bank to prop the currency up.

The yen-funded bet handed investors returns of more than 35% against the Colombian, Chilean and Mexican pesos last year, and it’s up 4.5% so far in 2024. 

Read More: BOJ’s Ueda Keeps Market Players Guessing Over Rate Hike Timing

To Kit Juckes, chief FX strategist at Societe Generale SA in London, rising debate surrounding a BOJ shift is likely to spur a change in money manager positioning.

“The speculative end of the market remains very short yen,” he said. Juckes sees recent official comments as an effort to keep traders from being too surprised by an eventual hike. The remarks may “nudge market positions now,” he said.

The next key test will come as BOJ policymakers convene on March 18 for a two-day meeting to lay out the path of policy ahead. While a substantial change at that meeting “is not impossible,” it would potentially be too early, said Tom Fitzpatrick, managing director of global markets insights at R.J. O’Brien & Associates.

Plus, a sustained move in the yen against the greenback would ultimately come down to a smaller gap between the BOJ and Federal Reserve’s policies. To Fitzpatrick, that will likely require Fed rate reductions, in addition to a Japanese shift. 

“We continue to believe that the BOJ’s imminent policy shift away from loose policy settings will help to provide more support for the deeply undervalued yen,” wrote Lee Hardman, foreign-exchange strategist at MUFG, in a Thursday note. “However, it will also require the Fed to begin lowering rates to narrow the policy divergence with the BOJ.”

--With assistance from Robert Fullem.

(Updates with CFTC data starting in the second paragraph.)

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