Now everybody’s printing money: here’s how to protect your wealth

published 19 September 2012

If Ben Bernanke was hoping that he could demolish the US dollar with never-ending money-printing, he might need to rethink his plans.

Because he's got competition.

The Bank of Japan joined the party this morning, throwing another 10trn (that's roughly £80bn) at the market. The move took analysts by surprise - they'd expected action next month instead.

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As you'd expect, Japanese stocks jumped, and the yen fell.

"Whether central banks intend it or not, there is a competition for loosening monetary policy around the world," as one analyst told Bloomberg.

So what does it all mean for your money?

Japan's goal: to keep the yen from getting any stronger

The Japanese government has been nagging the Bank of Japan (BoJ) in an unsubtle manner to copy the rest of the world and print money more enthusiastically.

The central bank is meant to be independent - like the rest of them. But as we all know, stray too far from the party line and central bankers soon find out just how independent they really are.

Finance minister Jun Azumi said that today's move by the BoJ was "very much welcomed." Japan's economy is struggling like most of the rest of the world. There are plenty of challenges, from the shutdown of its nuclear plants to fears over growing tension with China.

But the biggest problem is pretty simple it's the yen. The currency is one of the strongest in the world, and has been for some time. It has risen by nearly 50% against the dollar in the past five years. That's not great for exporters, and it also means throwing off deflation is difficult.

From a personal point of view, I can see the advantages to having a currency whose value stays broadly stable or even improves over time (cheap holidays for one). But that's not the way today's economies work.

So now the BoJ has expanded its own quantitative easing programme to 55trn , from 45trn before. And the government has made little secret of the fact that it doesn't want the yen any stronger than it is now.

Who's going to win this battle? Lots of investors believe that the US dollar is doomed. The trouble is, you have to look at what the competition are doing.

The UK is even more indebted than the US. While Mervyn King looks more reluctant than Bernanke does when he hits the money-printing button, he's actually been pretty aggressive with quantitative easing. So there's no reason to expect sterling to rebound strongly.

Europe has now started to embrace the printing press. For now, the euro has recovered because people no longer think it will break up. That means money is flowing back into the region. But if proper QE starts there, then I can't see how that would be good for the euro in the longer run.

And now we've got the BoJ becoming more determined to keep the yen from ruining the economy. So far, betting that the yen will weaken has been a very dangerous trade.

But look at it this way: the yen is at near-record highs; the US dollar, despite some recent strength, is still near historical lows. If both central banks are equally determined to undermine their currencies, which is most likely to succeed? The caretaker of the expensive currency, or the guardian of the one that's already cheap?I'd argue that the Japanese have the easiest job.

How to bet on a weaker yen buy Japanese stocks

This is just one reason why we're still keen on Japanese stocks. It's one of the easiest ways to profit from a weaker yen. If the yen does weaken, we'd expect the boost this gives share prices to outweigh any losses on the currency side (particularly for a sterling investor).

Obviously you could spread bet on the currency instead. Do bear in mind that it's highly risky and it's not really a long-term play. If you are interested in doing this, you should sign up for our free spread betting email, MoneyWeek Trader, where John C Burford shares his tips on maximising your profits and minimising your losses.

On a broader point, if everyone's printing money, what does that mean for the economy? We got an interesting report in from Deutsche Bank yesterday. They point out that central bankers' actions are turning the natural order of investing on its head.

"Loss-makers are compensated by a system that remains unable to tolerate the consequences of failure. Moral hazard continues to be encouraged," say the report's authors, Daniel Brebner and Xiao Fu. People who have made bad investments or taken on too much debt are being bailed out, while more prudent investors and savers are being punished.

Like it or not, this is likely to continue, because it's the path of least political resistance. "When one has accumulated too much debt, while the right thing to do is pay it back, the easiest thing to do is default and hope your creditor has a short memory. We believe the Western economies in general are biased towards the latter, whether they admit it or not."

What does that mean? "We expect a soft default will likely be the preferable course of action; a managed form of currency depreciation through various stages of quantitative easing or successive bailouts by central banks of the banking system."

There's one asset class that all of this is definitely good for, of course. That's gold. If everyone is trying to destroy the value of their paper currencies, then the value of a real' currency can only go up. I realise we've been saying it for a while, but you should hang on to gold as portfolio insurance. My colleague Dominic Frisby, back from sabbatical, gave his view on what'll happen to it next in yesterday's Money Morning read it here if you missed it.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.