Disappointment that the Bank of Japan did not unveil more measures to boost the economy as well as uncertainty over the course of U.S. monetary policy weighed hard on global markets Tuesday.
There had been expectations that the Bank of Japan, which started a big monetary stimulus this year to get the world's number 3 economy out of a two-decade stagnation, would announce new measures to ease 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 2 percent to 96.87 yen.
"The decision to hold steady prompted a sharp jump in the yen, and is also one factor contributing to weakness in global equities," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.
In Europe, the FTSE 100 index of leading British shares was down 1.6 percent at 6,298 while Germany's DAX fell 1.7 percent to 8,165. The CAC-40 in France was 1.8 percent lower at 3,793.
In the U.S., the Dow Jones industrial average was down 0.8 percent at 15,114 while the broader S&P 500 index fell 0.9 percent to 1,628.
Trading this week has been lackluster outside of Japan, 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.
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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 0.1 percent higher at $1.3268.
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.
By PAN PYLAS
AP Business Writer (AP:LONDON)