Shares and the euro fell on Tuesday after Moody's warned it could downgrade top-rated sovereigns including Britain, reminding investors that Europe is still deeply mired in a debt crisis despite Athens' steps to avoid a disorderly default.
European shares were expected to remain subdued, with financial spreadbetters expecting Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> to open between minus 0.1 to plus 0.1 percent.
The Bank of Japan surprised markets by loosening monetary policy further, boosting its asset buying and lending scheme to add more liquidity as it bowed to political pressure for bolder action to beat deflation and support the economy.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> shed as much as 0.9 percent, and last stood down 0.5 percent. Japan's Nikkei <.N225>, on the other hand, turned positive to rise 0.7 percent after the BOJ's announcement. <.T>
The euro was down 0.2 percent at $1.3166 and the British pound shed as much as 0.6 percent to $1.5707, after ratings agency Moody's said it may cut the AAA ratings of France, Britain and Austria, while downgrading Italy, Portugal, Spain, Slovakia, Slovenia and Malta.
Asian markets actually followed the news about downgrades in those European countries, as markets realised there is no resolution yet and revived worries over the European problem, said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.
The negative outlook to the UK, which was previously quite immune because it is not a member of the euro zone, also created a little bit of concern, because it seems it is affected.
The Moody's news weighed on already weak market sentiment as investors worried about Athens' ability to pursue harsh reforms in exchange for crucial aid. Relief over parliamentary passage of an austerity bill faded as intensifying violence across the country underscored the tough challenges ahead in Greece.
The bill's passage was only one of the three conditions for granting a new 130 billion-euro bailout, a lifeline for Greece to ride out a major bond redemption on March 20.
Europe gave Greece until Wednesday, when euro zone finance ministers are expected to meet, to specify how 325 million euros of the 3.3 billion euros demanded in budget savings will be achieved and to give a written commitment to implement the terms of the deal.
Provided there are no further setbacks at the EU meeting on Wednesday, terms of a bond swap deal with private bond holders to ease Greece's debt burden would then be announced.
Market uncertainty remains high, since a number of steps remain to ensure that there is no disorderly default in the near term, Barclays Capital said in a note, adding that Greek parliamentary elections in April would make implementation risks of the austerity measures particularly challenging.
The BOJ surprised by expanding a scheme under which it buys government and private debt and lends cheap funds against various types of collateral, by 10 trillion yen ($130 billion) to 65 trillion yen, with the entire increase in long-term JGBs.
Against the dollar, the yen fell 0.5 percent to 77.96 yen, its lowest in nearly 3 weeks, while 10-year Japanese government bond futures surged and cash bond yields fell.
The market consensus was that the BOJ would stand pat given its relatively favourable view on the economy's outlook and stabilising markets, said Junko Nishioka, chief Japan economist at RBS Securities in Tokyo.
It was probably a case of the BOJ easing as a precaution against future risks before they materialise as part of cooperation with other central banks, she said.
TURN OFF RISK
U.S. crude eased 0.4 percent to $100.51 a barrel, reversing from Monday's 2.3 percent surge when Greek news and concerns about supply disruptions from tensions between Israel and Iran supported prices. Brent fell 0.6 percent to
At a time when the oil market has had rallies for several weeks, it's probably a little bit of short-term nervousness of being caught on the wrong side, said Ric Spooner, chief markets analyst at CMC Markets, referring to a sell-off by traders after the Moody's downgrade.
Gold slipped 0.4 percent, along with the slide in the euro and equities, to stand at $1,716.30 an ounce.
Asian credit markets weakened, with the spreads on the iTraxx Asia ex-Japan investment grade index widening by 3 basis points.
Italian 10-year yields have so far this year shrunk by more than 150 bps as sentiment has improved, but the euro zone's lower-rated sovereign debts will face a test of investor confidence when a slew of auctions gets underway this week, including in Italy, Spain and France.
(Additional reporting by Tetsushi Kajimoto in Tokyo and Jessica Jaganathan in Singapore; Editing by Richard Pullin)