By Nigel Stephenson
LONDON (Reuters) - Shares rose in Europe and Asia on Monday, adding to gains chalked up in the wake of last week's stimulus package from the European Central Bank, as investors turned their attention to policy decisions from the Bank of Japan and Federal Reserve.
Yields on lower-rated euro zone government bonds, seen as the main beneficiary of the ECB's package of interest rate cuts and other measures, fell towards lows touched after the meeting.
German yields, the benchmark for borrowing costs in the bloc, initially underperformed after voters signaled disapproval of Chancellor Angela Merkel's open-door refugee policy in regional elections.
The pan-European FTSEurofirst 300 (FTEU3) stocks index rose 0.8 percent on Monday, led higher by Italian banks. Shares fell on Thursday after ECB President Mario Draghi said interest rates were unlikely to be cut further but rose the following day as investors focused on new cheap lending to banks.
"We believe there is enough value in the sector for continued performance on central bank stimulus — with peripheral banks likely to lead the way," said RBC Europe analyst Robert Noble.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) rose 0.7 percent, while Japan's Nikkei stock index (N225) added 1.7 percent.
The Bank of Japan began a two-day policy meeting on Monday and is expected to keep policy unchanged after adopting negative interest rates in late January.
In China, the CSI300 stocks index (CSI300) closed 1.6 percent higher and the Shanghai Composite rose 1.8 percent.
Mainland investors were encouraged by a regulator's assurance that it was premature to consider withdrawing government bailout funds from the market, and comments that dispelled fears of a flood of initial public offerings.
The Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) stock indexes hit their highest closes of 2016 thanks to the ECB measures and firmer oil prices.
The Fed, which concludes its policy meeting on Wednesday, has said it is on track to raise rates gradually this year, but its decision will hinge on the health of the economy. Recent data has shown the U.S. labor market remains strong but wage growth is still a concern.
The euro <EUR=>, which rose after Draghi signaled yet lower rates were unlikely, fell 0.2 percent on Monday to $1.1126, having set a one-month high of $1.1218 on Thursday. The yen <JPY=> strengthened 0.1 percent to 113.68 per dollar. Sterling
EYES ON FED
"The (Fed) meeting could see an acknowledgement of slightly improved conditions ... the Fed wants to make sure these developments have taken hold before acting. Such a dovish message could see downward pressure on the dollar," said Josh O'Byrne, currency strategist at Citi.
German 10-year government bond yields <DE10YT=TWEB> fell 2.9 basis points to 0.25 percent. Lower-rated Italian equivalents <IT10YT=TWEB> were last down 2.4 bps at 1.31 percent
Benchmark Brent crude oil (LCOc1), whose rise has helped buoy stocks in recent weeks, fell below $40 a barrel, last trading at $39.62, down 77 cents.
Gold (XAU) rose towards last week's 13-month high hit after the initial reaction to the ECB meeting. It last traded at $1,256 an ounce.