The yen hit its lowest level in more than two years on Friday as expectations of drastic monetary easing intensify, underpinning Japanese equities, while Asian shares were capped by worries the United States may run out of time to avoid a fiscal crunch.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2%. It has gained about 18% this year, a sharp turnaround from an 18% plunge in 2011.
Australian shares rose 0.8% to a 19-month high and were on track to post their strongest annual gain since 2009, with resources supported by rising iron ore prices. South Korean shares inched up 0.1%.
European shares were nearly flat overnight, and US stocks marked a fourth straight session of losses.
"A US fiscal deal is unlikely to be reached this year, but the stock markets will not fall sharply because a partial deal could be reached early next year," said Laurence Kim, an analyst at Woori Investment & Securities.
US Pesident Barack Obama will host a meeting on Friday with the four top congressional leaders, a White House aide said on Thursday, as the president and lawmakers rush to break a deadlock over the so-called fiscal cliff days before a year-end deadline.
The so-called fiscal cliff, a $600 billion combination of higher taxes and spending cuts, threatens to push the world's largest economy into recession, and stamp out fragile signs of recovery elsewhere.
As well as being deadline day for the fiscal cliff, December 31 is the date the federal government is set to reach its $16.4 trillion debt limit. The Treasury will have to take measures to buy time for the government to approve a rise in the debt ceiling.
A similar political stalemate over raising the federal debt limit in the summer of 2011 raised fears over a US default, and prompted Standard & Poor's to strip the US of its top-notch credit rating, causing a turmoil in financial markets.
US crude futures rose 0.7% to $91.48 on Friday after easing overnight on concerns that a failure to reach a budget compromise would hurt US demand for oil.
Asian bond issuance jumped to $133.8 billion so far this year, eclipsing the previous year's tally of $76.34 billion, as retail investors stepped up purchases of the region's corporate bond. Those bonds have returned nearly 20% this year, outshining Asian equities.
Japan remains in focus
Under the leadership of Prime Minister Shinzo Abe who took office earlier in the week, Japan is speeding up efforts to turn around its economy, battered for decades by its strong currency and deep-rooted deflation.
A survey on Friday showed Japanese manufacturing activity contracted in December at its fastest pace in more than three years.
Other data were also grim, with core consumer prices falling in November and industrial output plunging 1.7% in November from October.
Abe's repeated calls for "unlimited" monetary easing and policies aimed at reducing the yen's strength have bolstered expectations of a sustained period of yen weakness. This has lifted the mood in Japanese stocks as a weaker yen improves earnings prospects for the country's exporters.
The benchmark Nikkei average rose 0.5% after closing at its highest since March 2011 on Thursday. It is on track to log its best yearly gain since 2005.
The dollar climbed to its highest since August 2010 of 86.64 yen on Friday. The yen is on track for a drop of 12% this year, its steepest since 2005. The yen also fell to a 17-month low against the euro at 114.66 yen on EBS on Thursday.
The Australian dollar hit a 20-month peak against the yen of around 89.83 yen, according to Reuters data.
The Japanese government will compile spending requests for a stimulus package on January 7 and finalise the proposal shortly thereafter as Abe tries to quickly enact his agenda of increased public works spending to boost the economy.
