JAPAN´S LESSONS FOR FINANCIAL ALCHEMISTS / THE WALL STREET JOURNAL

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January 1, 2013, 2:07 p.m. ET

Japan's Lesson for Financial Alchemists

By THOROLD BARKER

 

 

 

 

In the middle ages, alchemists toiled fruitlessly to transform lead into gold. Things have gotten a little easier in the 21st Century. Big central banks can boost the value of assets by using printing presses. But how real are these gains? Shinzo Abe's new policies may give an indication.

The new Japanese prime minister wants the country's central bank to step up its money printing efforts to reflate the economy. Japan's Nikkei stock index has soared in response, up 20% from the low point hit Nov. 14.


But before U.S.-based investors pile into Japanese stocks, they should stop and consider the currency they would be buying into.


Take the MAXIS Nikkei 225 Index exchange-traded fund, which is listed in New York under the ticker symbol NKY. Since the same date in November, it is up only 10.8%.


Why the disconnect? Because some of the gains in the Nikkei have, for U.S. investors, been erased as the yen has weakened by about 8% against the dollar over the same period. In fact, while the Nikkei notched a 23% gain in 2012, U.S.-based investors would have done better buying, say, the SPDR S&P 500 ETF, traded under the symbol SPY, than the NKY. The SPY gained almost 12% last year compared with 10.1% for the NKY.


It is a stark reminder that there are no free lunches when very cheap money boosts financial markets.



The U.S. enjoys some protection as printer of the world's reserve currency. This has been shown by the dollar's resilience over the past four years or so of ultra-loose monetary policy.


Even that, though, is only relative to the paper currencies of other countries, many of whose central banks have also been happy to fire up the printing presses.