By Lisa Twaronite and Hideyuki Sano
TOKYO (Reuters) - Japanese stocks scaled seven-year highs on Wednesday, putting the rest of Asia in the shade, buoyed by expectations Prime Minister Shinzo Abe will postpone a planned sales tax hike to avoid damaging a fragile economic recovery.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.3 percent, after U.S. indexes ended a holiday-thinned session flat.
The Shanghai Composite Index fell 0.3 percent as investors locked in gains after their surge on the announcement of a tie-up that will give global investors easier access to China's $3.9 trillion stock market beginning next week.
Japan's Nikkei stole the limelight, jumping 1.6 percent to a fresh seven-year high after local media said that Abe will postpone a planned tax increase and call a general election for December in an effort to lock in his grip on power before his voter ratings suffer a slide.
Abe has said he will make up his mind on the tax increase after assessing the July-September GDP data due next Monday, widely expected to highlight the fragility of the rebound following a sharp contraction in the second quarter.
The first increase in the two-stage sale tax hike in April knocked the Japanese economy hard, and markets view a delay in the second-phase of the tax hike as positive for growth.
A snap election could cement Abe's grip on power because opposition parties are too fragmented to win, despite a decline in the prime minister's approval ratings.
"Short-term players are jumping onto this, although in the long run, this just means a delay in fiscal reform and not necessarily positive," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
The yen, which has remained under pressure for nearly two years due to the BOJ's aggressive stimulus, was steady against the greenback, which traded at 115.77 yen, after marking a seven-year high of 116.11 yen on Tuesday.
Some suggested the yen could come under pressure if Abe were to call a snap election and emerge victorious.
"Deteriorating fiscal discipline is of course a concern, but it is a mid- to long-term matter. Expectations towards further equity market gains is a key factor weighing on the yen at the moment," said Masashi Murata, a senior currency strategist at Brown Brothers Harriman in Tokyo.
The euro traded at $1.2462, down about 0.1 percent on the day but keeping some distance from a two-year low of $1.2358 hit on Friday.
In the energy market, crude oil continued to drop amid fears of a supply glut, with Brent shedding about 0.7 percent to $81.14 a barrel. U.S. crude fell 0.7 to $77.42.
Spot gold was edged down slightly to $1,163.40 an ounce.
(Additional reporting by Shinichi Saoshiro; Editing by Shri Navaratnam)
