Carry trades are having their best run in years, boosted by low FX volatility. But they become more challenging when a currency starts to swing, wiping out the small profit from rate differentials.
Analysts say it is hard to pin down the size of the carry trade, but point to currency short positions, essentially bets on an asset weakening, as a good proxy.
The recent intervention has prompted an unwinding of yen short positions, pushing the outstanding number closer to those in the franc.
"It's going to take a lot to shift away from the yen as a funding currency, but there is a lot out there to shake people out of that habit," said ING's global head of markets Chris Turner.
Although the yen is expected to remain a popular carry trade choice as one of the most actively traded major currencies, intervention risk is just one factor making investors think twice about betting against it.
Japanese rate-hike expectations and speculation that Japan's giant Government Pension Investment Fund could shift allocations towards domestic investments are also shifting yen dynamics.
With borrowing costs pinned down by the Swiss National Bank, the franc stands out as an obvious carry trade alternative to the Japanese currency.
"Not only are Swiss rates lower than the Japanese yen, but (franc) volatility is lower as well," said BofA's head of global G10 FX strategy Adarsh Sinha.
Swiss rates are currently 0% and Japanese rates are 1%.
BofA has a long-standing recommendation to sell the Swiss franc against the yen targeting 190 yen per franc, from 196 yen currently and 200 before the recent intervention. CHFJPY=
The recommendation is partly due to Japan's stabilising balance of payments but also supported by the fact that funding in Swiss francs looks more attractive than with the yen, Sinha said.
Any weakening of the franc under a shift to using it to fund carry trades would be welcomed by the SNB, which has said it would intervene if necessary to weaken the currency.
Neuberger's Repton said he wasn't as negative on the Swiss currency as he was two months ago given recent sharp moves, although he continued to "dislike" it.
ING's Turner said a shift to using the franc as a funding currency instead of the yen still appeared to be in the early stages, but could well take place.
"The Japanese want a stronger yen, the Swiss want a weaker franc, so it would make sense."
(Reporting by Alun John and Dhara Ranasinghe; Editing by Elisa Martinuzzi and Kirsten Donovan)
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