US, Japan Now Global Allies in Money Printing

CNBC.com | Monday, 8 Apr 2013 | 2:45 PM ET

U.S. markets, particularly the riskiest areas of investment, are likely to benefit at least near term from the latest entrant to the central bank money-printing arena.

Following the lead of the Federal Reserve, the Bank of Japan last week announced an even more ambitious project to use created funds to buy assets in the hopes of boosting investment and inflation.

Considering the U.S. central bank already has pushed its balance sheet past $3 trillion, that's saying something.

Not to fear, though, that Japanese markets may begin to compete with the U.S. for investment money: Many experts figure that the BoJ's efforts will only complement, rather than divert from, the American central bank stimulus regime.

"Money will go to where it's best treated," said Quincy Krosby, chief market strategist for Prudential Annuities. "We're on a scavenger hunt for yield, we're on a scavenger hunt for return. Right now, it's the U.S. market and the Japanese market."

The areas most likely to benefit from the BofJ announcement are Japanese equities, which have been on a parabolic rise since the market started anticipating central bank stimulus, as well as U.S. stocks and Treasurys and some global markets that maybe have underperformed but are ready to rebound.

"Ultimately, the BoJ intends to over-crowd the domestic market with their asset purchases," Priya Misra, rates strategist at Bank of America Merrill Lynch, said in a note to clients. "This would effectively force spillover demand to equity, overseas and other risk assets. US Treasurys should also benefit near term due to some crossover buying."

With many investors anticipating a U.S. market pullback after its strong first-quarter rally, the BoJ announcement comes at an opportune time.

Earnings season, with its expectations of little corporate profit growth, is setting up as an ideal pause point for the market. A weak nonfarm payrolls report Friday has led to consecutive weak sessions, and the market has been on a two-week string of alternating positive and negative trading days.

Indeed, the BoJ announcement has introduced an interesting dynamic to the markets across the board.

While U.S. stock market strength has hinged on a weak dollar, the greenback is hovering around a four-year high against the yen. Yet the U.S. markets have held in, despite a weakening economy.

Some strategists are beginning to talk about taking some money off the table and putting it in global markets until the U.S. market dips and creates a better entry point.

"In the end, none of this is based on fundamentals," said Michael Yoshikami, CEO at Destination Wealth Management. "It's all based on currency so it's going to have to end at some point. But at least for the short term I see it as a net positive for everyone."

From a strategy standpoint, Yoshikami said DWM has taken some profits and is investing in dividend stocks such as Johnson and Johnson, as well as developing markets like the Phillipines and Singapore while lightening up in China and Brazil.

But he sees a rally ahead for the U.S. after a pullback.

"'Don't fight the Fed' and 'don't fight the central banks' are sayings for a reason," Yoshikami said. "The money we're spending right now for central banks is going to come out of the economy five and 10 years from now. It might be a sobering result that we get less growth then because we're spending it today."

There are additional risks, the most glaring being that a big round of quantitative easing in Japan may be no better at stoking growth and the good kind of inflation there than it has been in the U.S. Despite the Fed's all-out efforts, unemployment remains elevated and inflation subdued, though stocks have soared.

Investors, however, have shown little interest lately in pondering long-term ramifications when there's money to be made today.

"Monetary policy is being used as the policy tool to create demand. The question is, is this going to end in tears?" Prudential's Krosby said. "Is this going to end in worse calamity for the markets than what we had in 2008 and 2009? No one knows. But the point is, the market's enjoying it now."

-By CNBC.com's Senior Writer Jeff Cox.