Is the best trade of 2013 losing its luster?

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Betting on yen weakness has been touted as the trade of the year, but with the currency hitting seven-week highs against the dollar, analysts are starting to question if the popular wager is losing its luster.

The yen strengthened to 96.60 against the greenback on Thursday, moving even further from the psychological 100 mark, as the prospect that the U.S. Federal Reserve may be less aggressive in tapering its monetary stimulus took the shine off the dollar.

(Read More: Where's the yen going? Look to the Fed for answers)

Expectations that Japanese investors would switch out of overseas currencies ahead of a mid-August holiday also helped support the yen, which has gained more than 3 percent since the low of 99.94 notched in the past week.

The strengthening yen has also caused a rout in the Japanese stock markets. The benchmark Nikkei has tumbled 6 percent so far this week, led by exporters who stand to lose their competitive edge with a robust currency.

(Read More: Will Japanese Tax Consume the Yen's Strength?)

"The idea of buying dollar-yen, which was once touted as one of the best trades of 2013 is now looking tenuous," said Kathy Lien, managing director of FX strategy at BK Asset Management.

"The break of prior 1-month low puts dollar-yen at risk of slipping down to its June lows near 95," she added.

Financial markets have been fixated on the volatile moves in the yen this year.

(Read More: Here's what could make or break Abe's reform plan)

The currency fell as much as 30 percent against the dollar in May from last November when Prime Minster Shinzo Abe's ambitious plan to revive Japan's flagging economy. But doubts over the effectiveness Abe's plan tempered the losses in recent months. The yen is currently down around 11 percent versus the greenback this year.

"Investors are still wary about the structural side of things and about whether you can get some really serious reforms," said Brian Jackson, global FX strategist at Coutts, referring to the "third arrow" of Abe's plans to implement structural reforms.

The first "two arrows" of easy monetary policy and fiscal spending have already been implemented earlier this year.

(Read More: Japan Fires 'Third Arrow,' but Will It Work?)

"(The Japanese government) have a lot of political opposition to them so it's not (going to be) as easy getting them through, as it was in terms of the monetary and fiscal policy that have already been implemented...and until we do see that I wouldn't be surprised to see some further moves in that direction (yen strength)," Jackson added.

Market watchers say the direction of the yen could hinge on the outcome of the debate of Japan's plans to hike consumption tax. Japan is due to raise its sales tax in April to 8 percent from 5 percent, and to 10 percent in October 2015, in a move that will help the economy cut its fiscal debt of over 200 percent of GDP.

(Read More: Sales tax hike will hurt but is necessary: IMF)

Critics of the tax say the measure could hamper Japan's nascent economic recovery, and recent media reports have suggested Prime Minister Shinzo Abe is considering delaying the hike.

Analysts at BNP Paribas, said shorting the yen was not advisable at the moment for this reason.

"We think yen short positions (the largest G10 position as per BNP Paribas' FX positioning analysis) remain at risk in the weeks ahead on growing uncertainty over passage of the consumption tax hike," they said in a note on Thursday.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie