The yen fell to a 20-month low against the dollar on Wednesday, buoying the benchmark Nikkei stock average, as Japan ushers in a new prime minister eager to pursue drastic stimulus steps to drive the country's economy out of deflation.
Asian shares and other assets were capped in thin holiday trade, with investors focusing on the fate of US negotiations to avert a budget crunch looming at the end of the year.
Markets in Singapore, Malaysia, Indonesia , the Philippines and South Korea were closed on Tuesday for the Christmas holiday, reopening on Wednesday. Hong Kong and Australia remain closed on Wednesday.
Europe also will not trade but, US markets reopen later in the day.
MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.1%, after rising 0.3% the previous day on the back of a surge in Shanghai shares to five-month highs and a jump in Taiwan shares.
Shinzo Abe, whose party won a landslide victory in an election earlier this month, will be sworn in as Japan's premier on Wednesday, when he is also expected to appoint his cabinet. He is prescribing a mix of aggressive monetary policy easing and big fiscal spending to beat deflation and rein in the strong yen. He has kept up pressure on the Bank of Japan to deliver much stronger monetary easing policies and called for a 2% inflation target to beat deep-rooted deflation, pushing the yen to a 20-month low of 85.38 yen on trading platform EBS on Wednesday.
Traders eyed the dollar's 2011 high of 85.53 yen as the next target. The euro rose as high as 112.47 yen on EBS, approaching its 16-month high of 112.59 yen hit on Dec. 19.
The weaker yen has bolstered hopes for better earnings from Japanese companies and underpinned the Nikkei, which has gained some 17% since mid-November when the election was scheduled, fuelling expectations for Abe's party to win.
The yen has lost nearly 8% against the dollar in the same period. The Nikkei was up 0.4%, holding above the key 10,000 mark. "Most foreign funds have added Japanese shares and there are fewer participants today, but there still is a reason for the Nikkei to rise," said Hideyuki Okoshi, general manager at Chibagin Securities. "Not only exporters but investors are buying other stocks which could benefit under the new government." Japanese government debt prices fell, with the 10-year bond futures falling to a three-month low of 143.65 in active trade.
The 10-year JGB yield rose 1.5 basis points to 0.780%, matching a six-week high hit on Dec. 19. "We continue to see equities going high, so the pressure is on the long end of the JGB curve. For the short end of the curve, we continue to see the BOJ ease aggressively, so there is no change in that," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.
Minutes of the BOJ's policy-setting meeting in November showed on Wednesday that some board members said the central bank must act decisively, without ruling out any policy options, if the outlook for the economy and prices worsens further.
The dollar was also expected to stay firm this week as investors repatriate dollars, and as the US fiscal impasse is likely to continue to sap investor appetite for risky assets and raise the dollar's safe-haven appeal. President Barack Obama may return to Washington from his Hawaiian holiday as early as Wednesday evening to address the unfinished "fiscal cliff" negotiations with Congress, an administration official said on Tuesday.
House of Representatives Speaker John Boehner failed to gain support for a tax plan at the end of last week, raising fears that the United States may face the fiscal cliff of some $600 billion in automatic spending cuts and tax increases set to start on Jan. 1.
"The main index is rebounding after treading water on Monday and dropping on Friday, as investors eye the progress of U.S. fiscal negotiations," Kim Soo-young, an analyst at KB Securities, said of South Korean shares which turned 0.7% higher in low holiday volume.
Activity is likely to remain subdued, with volume low and without major economic news. Later in the session, Thailand will release trade data, which is expected to show exports in November posting very high annual growth compared with low levels last year that reflected the damage from the flooding.
South Korea's key consumer sentiment index held steady in December from November and stood below the neutral point for a fifth consecutive month, the central bank said on Wednesday, diminishing hopes of a quick economic rebound. Gold edged lower on Wednesday on uncertainty over whether the fiscal cliff, but a weaker yen sparked a rally in bullion futures on the Tokyo Commodity Exchange (TOCOM).