Japanese Stocks Gain 5% Monday but Are Still Down 14% From May Peak

Investors are being taken for a wild ride in Japan, leading some to ask whether U.S. markets will follow suit. As you can see in the chart below, Japan's benchmark Nikkei (NIKKEIINDICES: ^NI225  ) had gained 80% between November of last year and the middle of May, only to fall by 17% through last Friday and then make up 5% of that lost ground in one fell swoop today.

While Japan's experience is extreme, investors here in the United States should nevertheless take note if for no other reason than that both countries are experiencing asset-price inflation tied to monetary policy. As I discussed here, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and the S&P 500 (SNPINDEX: ^GSPC  ) have rallied by 17% and 18%, respectively, since the beginning of last September as ultra-low yields in the bond market courtesy of the Federal Reserve's third round of quantitative easing push income-seeking investors into stocks.

This begs the question: What happens when the central bank removes its support? At Berkshire Hathaway's annual meeting last month, Warren Buffett said the inevitable announcement will be the "shot heard round the world." He went on to say that the Fed's ongoing bond-buying program is a "huge experiment" and is akin to "watching a good movie, and I don't know the ending."

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