By Megan Cheah and Fabiana Negrin Ochoa

Global fund managers are retaining their yen positions despite the currency's fall to its lowest level against the dollar in 40 years, taking a patient approach as speculation swirls that Japan could intervene again.

Even if Japan steps in to support the yen, there are doubts about the effectiveness of intervention. That's illustrated by the yen moving past 160 against the dollar, which was its level when authorities intervened in April and May. It hit a low of 162.83 on Wednesday, LSEG data showed.

The yen has depreciated steadily in recent months, weighed by safe-haven demand for the dollar fueled by war in the Middle East and the U.S.'s relative insulation to oil-price swings. The U.S.-Iran ceasefire lessened geopolitical headwinds, only for the Federal Reserve to turn more hawkish.

Interest rates in Japan are much lower than in the U.S., so it is attractive to borrow yen and invest in dollars. With markets anticipating Fed rate hikes and gradual tightening by the Bank of Japan, the so-called carry trade is in full effect.

"It's a trend, people are jumping on top of it: Yen is cheap to borrow," said Naomi Fink, Amova Asset Management's chief global strategist.

Eastspring Investments, which has about $269 billion in assets under management, has had an underweight yen bias in portfolios since the year began, using sharp bouts of appreciation to rebuild short exposure to the currency.

Structural forces, including concerns around Japan's fiscal expansion under Prime Minister Sanae Takaichi, likely will continue weighing on the yen, said Rong Ren Goh of Eastspring, Prudential PLC's Asian asset-management arm.

The view that the Bank of Japan is falling behind the curve in raising rates is also pressuring the currency, said Goh, Eastspring's head of macro and thematics, Asian fixed income. He said Eastspring remains comfortable being underweight the yen until the monetary or fiscal backdrop visibly changes.

Seattle-based Russell Investments uses the yen as a diversifying currency in funds. It's keeping its allocation to the currency neutral.

"We are looking quite closely at whether we get to stretched sentiment, but I don't think we're there yet," said Alex Cousley, a senior investment strategist at Russell.

Data from the U.S. Commodity Futures Trading Commission on yen positioning among speculators has moved quite short, but it's "nowhere near where it was in previous panicked episodes," he said.

If the yen weakens further and the market becomes extremely pessimistic about the currency, Russell could consider adding to its yen positioning, he said. The dollar-yen would likely have to hit 166-167 for that to happen, Cousley said. The yen last traded at 161.15.

Many institutional investors say the apparent disconnect between Japan's economic fundamentals and the yen's persistent weakness complicates portfolio steering.

For Pimco Japan co-head Tomoya Masanao, the yen looks undervalued by most measures.

Moves are driven more by a stronger greenback than yen depreciation, Masanao said. "We do not have a strong conviction on the direction of USD/JPY at the moment and therefore remain largely neutral in our allocation to JPY currency exposure in client portfolios," he said.

Amova's Fink, too, thinks fundamentals suggest the yen should be valued at least a bit higher.

A falling yen made sense when the Iran crisis began, she said, because Japan had to spend more on energy and other imports. But then the Bank of Japan hiked rates, the Fed stood pat and now oil prices have fallen.

She doesn't agree that Japan's central bank is moving too slowly either.

"If we do see inflation expectations unanchor, for example, then that will be your confirmation that the Bank of Japan is behind the curve," Fink said. "But that hasn't happened yet."

The question then is, what do you buy with a cheap yen?

Whereas in traditional carry trades investors bought the longer end of the yield curve, now it's going into equities, especially those related to the artificial-intelligence supply chain, said Fink.

For Federated Hermes, AI and a tightening Bank of Japan are the major themes anchoring its largest positions. The asset manager is slightly overweight to Japan in its allocations, partly because the yen is at a 40-year low.

"On the one hand, we believe that owning technology and industrial exporters is the best way to position for yen weakness," said Martin Schulz, head of Federated Hermes's international equity group.

On the other, Federated Hermes views Japanese banks focused more on the domestic market as a good bet when the Japanese central bank is raising rates. That's because the banks can generate wider net interest margins and higher net interest income.

Write to Megan Cheah at megan.cheah@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com.