(Bloomberg) -- Japan’s much-anticipated exit from its ultra-easy monetary policy is likely to have the unusual effect of making the equity market the biggest beneficiary from interest-rate hikes.

That’s the prediction of Yue Bamba, head of Japan active investments at the world’s biggest money manager, BlackRock Inc., who flagged that big underweight positions point to further fund flows into the market.

His comments come as bets that the Bank of Japan will shift policy are reshaping the investment landscape in Japan, suggesting that equities are poised for more gains after the biggest rally since 2013 last year. A decade after late Prime Minister Shinzo Abe introduced reflationary measures, dubbed Abenomics, Japan seems to be in its final stage of declaring victory over decades of deflation. 

“The focus of Abe was getting Japan out of deflation and that was enough to capture the minds of global investors,” Bamba said in an interview on Wednesday. With everything from strong earnings to increased capital expenditure providing a tailwind, “there’s more behind equities than other asset classes,” said Bamba. “Japan sticks out as a big underweight in portfolios that there shouldn’t necessarily be anymore.”

The central bank has been laying the groundwork to deliver its first rate hike since 2007 as inflation has remained above its price target of 2% every month since April 2022. 

Bamba expects the BOJ to start normalizing policy as early as March, but said any change is likely to be moderate and accommodative. “This makes Japan more of an interesting investment destination for investors globally,” he said, citing the contrast with the restrictive monetary environment in US and European markets.

Robeco Institutional Asset Management and BNP Paribas Asset Management share the bullishness. 

“Japanese companies are under pressure from both foreign and domestic investors, along with the government and the financial markets regulator, to return more capital to shareholders,” Arnout Van Rijn, a fund manager with Robeco Sustainable Multi-Asset Solutions, wrote in a note last week. The team is already long Japanese equities, using derivatives that predict they’ll extend recent highs, he wrote.

The benchmark Nikkei 225 Stock Average has climbed 15% so far this year following a 28% surge last year, and is within sight of an historic peak. 

Share buybacks are on pace to exceed those last fiscal year, which was already the highest since 2005, said Rie Nishihara, JPMorgan Chase & Co.’s chief Japan equity strategist. She cited about ¥8.5 trillion ($57 billion) worth of buyback announcements so far this financial year as of the start of this month.

Wei Li, a multi asset quant solutions portfolio manager at BNP Paribas Asset Management, also favors equities over the yen and Japanese government bonds on view that the BOJ’s interest-rate increases will be gradual. This won’t boost the currency so quickly, and won’t make sovereign debt attractive, Li said in an interview Thursday. 

Appreciation in the yen that would come from a modest rate hike would still keep Japan’s currency at a relatively cheap level, with limited impact on companies’ earnings, according to Bamba. Gains of 10-15% in the yen would be “very positive” for equities from the perspective of dollar-based global investors, he said.

The Tokyo Stock Exchange’s reforms are also a big reason to favor Japanese equities, BNP Paribas’ Li said. 

“Overweight Japan equity is a consensus in the market but investors are currently still underweighted,” Li said. “It’s still in the early stage and the flow can still support further outperformance.”

--With assistance from Eddy Duan.

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