Japanese shares lead Asia rally as Yellen effect holds sway

Seoul's KOSPI climbed 1.9 percent and was on track for its largest gain in four months. Shares in Shanghai rose 1.9 percent, while Australia added 0.8 percent.

MSCI's broadest index of Asia-Pacific shares sped ahead by 1.1 percent for a second day of gains.

Wall Street reached record highs on Thursday after Yellen robustly defended the central bank's bold steps to spur economic growth, calling efforts to boost hiring an "imperative" at a hearing into her nomination.

The Dow ended 0.35 percent higher, while the S&P 500 gained 0.48 percent. The Nasdaq was restrained by Cisco Systems Inc after disappointing results knocked 10 percent off its share value.

"Yellen still believes the benefits of QE outweigh the costs-- a little tidbit that could have been the most important thing she said market-wise," said William O'Donnell, chief US government bond strategist at RBS Securities in Stamford, Connecticut.

"She did not strike me, or our economics squad, as somebody ready to roll back on QE3 and that even another 200,000-plus print in the next nonfarm payroll number may not sway her."

One result is that the Fed finally seems to be convincing markets that even if it does taper, an actual increase in the official funds rate will still be distant. Short-term debt markets rallied hard as investors pushed the timing of the first hike far into the future.

LOW FOR LONGER

Indeed, there has been a radical reappraisal on the outlook for tightening since the Fed skipped a chance to start tapering in September. Back then futures on the Fed funds rate had implied a first hike in late 2014. Now a move to 0.5 percent is not fully priced in until November 2015.

In just the past couple of days Eurodollar futures have rallied so sharply that they now predict the cost of borrowing dollars will stay near zero out to 2016.

That in turn has helped drag down Treasury yields, with rates on two-year notes at just 29 basis points compared to a peak of 54 in early September.

For once the decline in yields did not trouble the US dollar too much, in part because rates in Europe were falling even more following another disappointing economic report.

Data showed the euro zone only just emerged from recession in the third quarter with growth of a miserly 0.1 percent as France contracted.

The euro was off at USD 1.3450 after getting as high as USD 1.3497 on Thursday.

Neither were there any signs the Bank of Japan would be diverted from its massive stimulus efforts with data showing the economy slowed markedly last quarter as consumers and businesses proved reluctant to spend.

Yen bears also got traction on Thursday after Finance Minister Taro Aso told a parliamentary committee Japan must retain currency intervention as a policy tool.

The dollar has been making steady gains on the yen for three weeks now to finally breach the 100.00 barrier. It was now enjoying the view at 100.27 yen, having bounced from a low of 99.11 on Thursday.

In commodity markets, Brent crude oil rose a third straight on worries about crude supply disruptions in Libya, while gold drew some comfort from the prospect of continued US stimulus.

Brent for December delivery was up 8 cents at USD 108.36 a barrel, while US crude added 39 cents to USD 94.15. Spot gold edged up to USD 1,289.16 an ounce and away from the week's trough of USD 1,260.89.