(Bloomberg) -- The yen-funded carry trade could be back on again if the Bank of Japan manages to execute adjustments to its policy without turning in a markedly more hawkish direction, according to Bank of America Corp.

The strategy, which involves borrowing in the relatively low yielding Japanese currency and lending in one with higher rates, has historically been a popular way for investors to take advantage of policy differentials between countries. It works best when rate gaps are wide enough to make the risks worthwhile and volatility is low, reducing the danger that any gains from yield might get wiped out by valuation moves.

Interest-rate gaps between Japan and a number of its major peers right now are relatively wide, especially versus the US, where Federal Reserve policy makers have indicated that they are willing to take benchmark borrowing costs even higher still. And implied volatility within foreign-exchange markets has fallen markedly from its highs last year. Despite that, though, the yen carry trade has remained relatively uncrowded, according to Bank of America, owing in large part to risks surrounding the BOJ.

Those are “likely keeping JPY bears away from taking positions” even though “interest rate differentials are increasingly conducive”  to the yen carry trade, strategists Shusuke Yamada and Tomonobu Yamashita wrote in a note. If the BOJ were to execute a policy tweak “without a hawkish pivot” that could “unleash” the yen carry trade, in their view.

The outlook for BOJ policy is in flux right now, with incumbent Governor Haruhiko Kuroda set to hand over the reins of leadership following his final scheduled policy meeting, which takes place this week. His designated successor Kazuo Ueda is set to take over at a time when pressures have been mounting for the BOJ to eventually move away from its longstanding policy of easy money. But that does not necessarily mean the BOJ will actually lift benchmark borrowing costs or even abandon entirely the unorthodox measures it has been using.

Absent a truly hawkish move, the various pressures weighing on the yen — which has already weakened more than 4% so far in 2023 — could lead it to weaken further.

The dollar-yen pair has scope to price in US rates that are higher for longer, according to Bank of America, which pointed to various yen-negative factors including Japan’s sticky balance of trade deficit, improved demand for foreign bonds by Japanese investors and the possible re-emergence of the carry trade.

The pair was around 137.43 yen per dollar in US trading late Wednesday, up from 135.87 at the end of last week, and Bank of America predicts that it will top 140.

©2023 Bloomberg L.P.