It seems no one can get their Kobo Touch to connect to WPA2 w/ AES encryption. This combination appears to result in the Invalid Password error. Even if you have your router set to recognize WPA2/WPA and AES/TKIP, you will still get the error.
I fixed mine by forcing my router to WPA ONLY w/ TKIP ONLY and reducing my password from 64 characters to 13. There was no need for a factory reset or manually entering my SSID after I did this. It seems that the Kobo Touch just does not recognize WPA2-AES w/ 64 character PWs.