Investors have fallen over each other in recent weeks to buy the yen on bets that interest rates are finally about to tip in Japan¡¯s favor. They face a moment of truth as soon as Wednesday.

The currency has climbed roughly 5% against the dollar since it began surging on July 11, a move that was amplified by suspected market intervention from Japanese authorities. After vacillating between gains and losses in Tokyo and London trading Friday, the yen rallied as much as 0.5% in New York before paring the advance.

But some investors warn that the rally is fragile, as was on show this week when the yen rapidly retraced an advance after Thursday¡¯s stronger-than-expected U.S. economic growth figures.

Swaps markets suggest a roughly 45% chance of the Bank of Japan hiking rates by 15 basis points at the conclusion of its July 31 policy meeting, indicating plenty of caution. And only 30% of BOJ watchers surveyed by Bloomberg forecast a hike, even if more than 90% see it as a risk.

That leaves yen bulls vulnerable, particularly if the BOJ also disappoints on expectations for a sizable cut in bond purchases, or if the Federal Reserve later in the day does anything to dampen hopes for a rate cut in September.

¡°This is a crazy yen rally,¡± said Nick Twidale of ATFX Global Markets, who has traded Japan¡¯s currency for a quarter of a century. ¡°The BOJ could be party poopers and not play their part in tightening policy.¡±

Twidale said that if the BOJ underwhelms the market, carry trades that have kept the yen weak ¡°may come back with a vengeance.¡±

Others from BlackRock Inc. to former central-bank officials are predicting the BOJ will stand pat on interest rates for longer.

Patchy economic data lend credence to this view: While a key gauge tracking the strength of Japan¡¯s service sector rebounded in July, a measure of factory activity showed a contraction. Weak consumer spending is further complicating the BOJ¡¯s decision next week, people familiar with the matter say.

¡°If BOJ does nothing, the dollar-yen rate could surge again,¡± said Amir Anvarzadeh, strategist at Asymmetric Advisors who has tracked Japanese markets for over three decades.

The yen traded 0.1% higher to 153.75 per dollar at 3:30 p.m. in New York. Inflation figures for Tokyo earlier showed that consumer prices accelerated for a third month.

Nathan Swami, head of FX trading for Asia Pacific at Citigroup in Singapore, saw additional demand for bullish yen options after the outsized move this week.

¡°It is still too early to tell if this signals a longer-term investor sentiment shift, and may thus more likely be a tactical shift in short-term...