LONDON Disappointment at the failure of the Bank of Japan to unveil further measures to boost the country's economy weighed on markets Tuesday.
There had been expectations that the central bank, which started a big monetary stimulus earlier this year in an attempt to get the world's number 3 economy out of a two-decade stagnation, would announce new measures to ease the volatility in the Japanese bond market. Instead the bank's policy board merely upgraded its economic assessment.
The disappointment was enough to send Japan's Nikkei stock index down 1.5 percent to close at 13,317.62. However, the retreat was modest in light of the previous day's 4.9 percent advance following an upward revision of first-quarter economic data. In tandem with the fall in equities, the yen made big gains - the dollar was down 1.8 percent to 97.05 yen.
The Nikkei's retreat, which was also affected by the appreciation of the yen, weighed on other markets in Asia as well as trading in Europe. In recent weeks, markets around the world have often taken their cue from developments in Tokyo.
"The failure to adapt additional stimulus measures to help ease volatility in debt markets has caused European markets fall into the red," said Brenda Kelly, senior market strategist at IG.
In Europe, the FTSE 100 index of leading British shares was down 1.3 percent to 6,319 while Germany's DAX fell 1.6 percent to 8,175. The CAC-40 in France as 1.5 percent lower at 3,808.
Wall Street was poised for a retreat at the open too -- Dow futures were down 0.4 percent while the broader S&P 500 futures fell 0.5 percent.
Trading so far this week, outside of Japan, has been fairly lackluster with investors uncertain which way the markets are going. This uncertainty follows a fairly volatile period that's seen many of the world's major stock indexes come off multiyear or even record highs.
As well as focusing on whether Japan's monetary experiment will work, investors have been keenly monitoring developments in the U.S. and whether the economic picture has improved enough for the Federal Reserve to reduce the amount of financial assets it buys in the markets -- so-called tapering. Speculation that it will has eased somewhat after last week's slightly better-than-expected U.S. jobs report for May.
Many financial assets, including stock markets and emerging market currencies, have been propped up somewhat by the Fed's money-creation measures over the past few years and any talk that it will change policy has been met with some concern by some investors even though it would indicate that the U.S. economy has improved following the financial crisis.
Again, following last week's bumper data week, there's little scheduled economic news Tuesday for traders to get their teeth into so markets may well drift for the rest of the session.
"The major equity markets remain hesitant and investors are still focusing on what the Federal Reserve might do in 'tapering' its monthly bond purchases," said Neil MacKinnon, global macro strategist at VTB Capital.
The debate over the Fed has been the main driver for the dollar too. An easing in the expectations of tighter U.S. monetary policy has seen the euro recover some ground over the past week despite concerns over the economy of the 17 EU countries that use the currency -- it was trading 0.2 percent higher at $1.3281.
In Europe, the main point of interest was the start of a two-day hearing by Germany's constitutional court on the legality of the European Central Bank's approach to the euro crisis.
Uncertainty over mainland China's resilience further has also weighed on sentiment following the weekend release of discouraging data for the world's second-largest economy.
With China's markets closed until Thursday for a national holiday, Hong Kong's Hang Seng index has traded in a limited range, falling 1.2 percent Tuesday to 21,354.66. Elsewhere, South Korea's KOSPI dropped 0.6 percent, to 1,920.68.