Dec 26, 2012 12:42 PM IST | Source: Reuters

Yen falls as Japan forms new govt, supporting Nikkei

Yen falls as Japan forms new govt, supporting Nikkei

Expectations that Japan's incoming prime minister will pursue drastic stimulus policies to drive the country's economy out of deflation helped weaken the yen and underpinned the Nikkei on Wednesday, while Asian shares were capped in thin holiday trade.

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.

MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.1 percent, after rising 0.3 percent the previous day on the back of a surge in Shanghai shares to five-month highs and a jump in Taiwan shares.

Shinzo Abe, who won a landslide victory in an election earlier this month, will be sworn in as 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 percent inflation target to beat deep-rooted deflation, pushing the yen to a 20-month low of 85.08 yen on trading platform EBS early on Wednesday.

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.

Japan's Nikkei stock average opened up 0.5 percent, after recapturing the key 10,000 mark it ceded on Friday and ending up 1.4 percent.

"The market is overbought, so the Nikkei may not rise sharply, but 'Abe trades' may invite some buying," said Hiroichi Nishi, general manager at SMBC Nikko Securities, adding that if the dollar trades above 85 yen, investors are likely to chase the Nikkei higher to near 10,200.

Aside from the Japanese factor, 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.

US lawmakers and President Barack Obama were on Christmas holiday and talks were unlikely to resume until later in the week.

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 USD 600 billion in automatic spending cuts and tax increases set to start on January 1.

"With the exception of the US fiscal talks, there is no particular issue that could dampen investor appetite to any great degree," said Lee Kyung-min, an analyst at Woori Investment & Securities.

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 as a result of low levels last year reflecting 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.

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