Man Group’s £2.45bn Japan CoreAlpha Fund has begun selectively adding Japanese bank stocks, betting that the Bank of Japan (BOJ) will eventually raise rates to tackle persistent inflation, according to a report by Bloomberg.

Portfolio Co-Manager Emily Badger said relative stability in the yen has created more scope for the BOJ to move towards policy normalisation. “Inflation is higher than last year, the yen-dollar is more stable than last summer,” she said. “We have therefore taken the opportunity in the short term to increase our position in the bank sector slightly, as we think the path is clearly towards normalisation.”

The long-only fund, which has outperformed more than 90% of peers over the past three years, began 2024 underweight financials. Badger had previously argued that benefits from future tightening were largely priced into bank valuations. The latest allocation shift is described as “very gradual,” with autos and factory automation stocks remaining the fund’s larger positions.

Overnight index swaps now imply a 55% probability of a BOJ hike by year-end, down from 79% before the central bank’s July meeting, which markets viewed as dovish despite upgraded inflation forecasts. Badger expects rates could eventually approach 1% once political and trade uncertainties, including US-Japan tariff tensions, ease.

She also sees corporate governance reforms as a long-term driver for Japanese equities, which hit record highs this month but continue to trail some regional peers, and believe that the next phase of reform will focus on enhancing long-term profitability and growth.