The yen rose and Japanese shares gave up some of their strong early gains on Monday after the Bank of Japan made only minor tweaks in policy, disappointing markets looking for more aggressive action against deflation.
In an emergency meeting, Japan's central bank voted to expand its cheap fixed-rate loan programme for banks, but stopped short of bolder steps to stem a rise in the yen that has threatened the country's already fragile economic recovery.
Leading European shares <.FTEU3> rose for a third straight session, mirroring gains in Asia and on Wall Street on Friday after Federal Reserve Chairman Ben Bernanke downplayed concerns that the slowing U.S. economy might slip back into recession. <.N>
S&P 500 futures rose 0.4 percent, pointing to a stronger opening for U.S. markets later in the day.
Tokyo's Nikkei <.N225> ended up 1.8 percent after rising more than 3 percent before the BOJ announcement, while Japanese government bonds pulled back sharply from their intraday lows. <.T>
Asian stocks outside Japan <.MIAPJ0000US> rose 1.3 percent.
Bank of Japan Governor Masaaki Shirakawa said the central bank needs to carefully examine the drawbacks when considering already low interest rate but did not rule out any specific policy option in case the economy worsens.
The strengthening Japanese currency, which hit a 15-year high of 83.58 yen against the dollar last week, has taken its toll on the country's exporters, pushing the Nikkei <.N225> down nearly 20 percent since its peak in early April.
The yen firmed against the dollar after the BOJ's move, which was seen by investors as a symbolic gesture that would do little to halt the currency's climb and may prolong deflation.
At 0700 GMT (3 a.m. EDT), the dollar was hovering around 85 yen from around 85.88 yen just before the BOJ announcement. The euro slid to 108.23 yen from around 109.49 yen beforehand.
If the BOJ really wanted to do something about the strength of the yen, they should have done something about deflationary pressures. The current policy of doing nothing simply isn't working, said Robert Rennie, currency strategist at Westpac in Sydney.
Global investors will continue to focus this week on the U.S. economy's flagging momentum, with a slew of economic data from Washington including August payroll figures expected to add to the gloomy outlook.
Even if the U.S. economy does avoid a double-dip recession, investors fear growth could effectively stall, making companies and consumers even more cautious about fresh spending.
Later on Monday, the U.S. commerce department is scheduled to release July personal income and consumption data which is expected to show a rise of 0.3 percent in both income and spending, according to a Reuters survey.
Oil stayed near an eight-day high above $75 a barrel, while spot gold was slightly lower at $1,235.35 an ounce.
(Additional reporting by Aiko Hayashi in TOKYO)
(Editing by Kim Coghill)