By Nigel Stephenson
LONDON (Reuters) - European shares fell on Tuesday, pulled lower by mirroring declines in Asia after the Bank of Japan painted a bleaker picture of the Japanese economy and helped push the yen higher, and as oil and metals prices dropped.
U.S. stocks were set to open lower, according to index futures, as investors' focus turned to a two-day U.S. Federal Reserve policy meeting beginning on Tuesday.
It is likely to signal a slower pace of interest rate hikes than forecast after the Fed raised the cost of borrowing in December for the first time in nearly a decade.
The BOJ, like the European Central Bank, has resorted to negative rates in an effort to spur growth and inflation.
The Fed signalled in its "dot plot" charts of the possible path of interest rates after its December hike that it could raise rates four more times this year. Economists say this could be reduced to three or even two.
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Recent data has suggested the U.S. economy is strengthening, however, with fears of recession much diminished compared with earlier this year.
"The Fed meeting is important because ... there is a risk of a hawkish statement," RIA Capital Markets bond strategist Nick Stamenkovic said. "Investors will wait for the statement and the dot plots before taking new positions."
The pan-European FTSEurofirst 300 stocks index fell 1 percent, led lower by commodity-related stocks. The STOXX Europe 600 Basic Resources index was down 4.3 percent.
"There is still a soft demand coupled with excess supply story in the commodities spectrum," said Lorne Baring, managing director at B Capital Wealth Management.
Tokyo's Nikkei share index closed down 0.7 percent as a stronger yen hurt exporters. MSCI's broadest index of Asia-Pacific shares outside Japan extended early losses and were down 1.2 percent.
Chinese shares eked out small gains. The CSI300 index of the largest listed firms in Shanghai and Shenzhen rose 0.3 percent and the Shanghai Composite 0.2 percent.
The yen strengthened after the BOJ removed from its post-meeting statement language used after it cut rates in January that it would lower them further into negative territory if needed.
The dollar was down 0.7 percent at 113.00 yen.
"The bias is just in favour of a stronger yen," said Derek Halpenny, European head of global market research at Bank of Tokyo Mitsubishi. "On the days when we are 'risk on', the yen holds strong and on days like today, it gains."
The euro edged down to $1.1091. Sterling GBP=> fell 1 percent to $1.4160 after a new opinion poll showed supporters of Britain leaving the European Union were ahead in the run-up to a June referendum on the issue.
Bookmakers' odds indicate punters believe it is twice as likely that Britons will vote to remain in the EU.
OIL DROPS
Oil prices, which fell up to 4 percent on Monday, dropped further after the Organization of the Petroleum Exporting Countries (OPEC) said it expected lower demand for crude in 2016 than previously thought.
Brent crude last traded down $1 a barrel at $38.53, raising the possibility that a six-week recovery in oil prices that has helped buoy stocks markets may be fading.
Euro zone government bond yields, which fell in the previous two days after the European Central Bank cut interest rates and expanded its asset-purchase scheme last Thursday, held steady.
U.S. Treasury yields fell as investors squared up positions before the Fed meeting. Ten-year yields fell 3 basis points to 1.93 percent.
Gold, up around 16 percent this year, held near two-week lows. It last traded around $1,236 an ounce.
(Additional reporting by Saikat Chatterjee in Hong Kong, Marius Zaharia, Patrick Graham and Atul Prakash in London; Editing by Jeremy Gaunt)