Is the Best Trade of 2013 Now Over?

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Selling the Japanese yen has been one of the hottest trades of the year, but the currency's rebound against the U.S. dollar in the past three weeks has some questioning whether the short-yen trade has now run its course.

The yen was trading at about 98.65 to the dollar on Tuesday, off a two-month peak hit on Friday at around 95, but still more than 4.5 percent above a four-and-a-half year low hit last month.

(Read More: Dollar-Yen Shake-Out Could Just Be the Start)

"The short yen trade started to look very slippery in late May into early June when the yen started to rise rapidly," said Kathy Lien, managing director at BK Asset Management in a note. "This aggressive reversal, which happened within 2.5 weeks led many traders to wonder if the best trade of 2013 is now over."

Even with the yen's recovery, the currency is down 14 percent from where it started the year and analysts say some investors are using the yen's bounce as an opportunity to put on fresh short-positions, in other words a bet that the yen will head lower.

Many currency strategists are sticking to their call for the yen to weaken to 110 against the greenback this year.

Dennis Gartman, editor of The Gartman Letter, told CNBC's "Fast Money" on Monday that the yen was likely to go much lower, with a move to 150 "not that difficult an imaginative leap."

(Watch Now: Japan Bears Can Come Out Now: Gartman)

Uncertain Path

But the outlook may not be that clear cut, say analysts, as investors question the implications of "Abenomics." The radical economic policies of Japanese Prime Minister Shinzo Abe were expected to lead to outflows from Japan and underpin weakness in the yen that would in turn support a recovery in the Japanese economy, but that expectation has yet to become a reality.

"Prime Minister Shinzo Abe has failed to introduce new prescriptions to fix the economy when he unveiled his latest policy agenda to everyone's disappointment ," Lien said, referring to a long-term growth strategy unveiled by Abe last week. She added that "investors have been rethinking the impact of 'Abenomics'."

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

Robert Rennie, global head of currency strategy at Westpac Bank, told CNBC Asia's "Squawk Box" that he believed the yen would trade in a range between 95 and 105 for most of the year, suggesting that any further weakness in the Japanese currency was likely to be limited.

"We are not significantly bullish on dollar/yen," he said. "The third "arrow" [of long-term reforms] is not good enough. Abe's first 'arrow' of aggressive monetary policy, the market moved very aggressively on that, the hedge fund community sold [the yen] on that."

"But it's not the expectations of economic reforms but the reality that will drive markets now. Maybe Japan will only be able to do that after the upper house [parliament] elections in July," he added.

— By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC