Falling yen lifts Japan stocks; eyes on China data

A Tokyo Stock Exchange employee looks up at a monitor displaying market indices at the bourse in Tokyo November 5, 2012.

TOKYO (Reuters) - The yen fell to a 7-1/2-month low versus the dollar on Thursday, lifting Japan's Nikkei share average to a six-month high, on mounting expectations of aggressive policy action under a likely new government.

Asian stocks outside Japan were also in demand and investors will focus on HSBC China flash PMI for November due later on Thursday to see whether a low point for China, the world's second largest economy, is over.

The Japanese currency fell to 82.535 yen to the dollar and has fallen around 4 percent in the last 1-1/2 weeks. The yen is expected to continue to be under pressure ahead of the December6 Japan election.

Shinzo Abe, leader of the main opposition Liberal Democratic Party, who is expected to win the election, has called for more extreme measures from the Bank of Japan bank to pull the export-reliant economy out of deflation.

"The dollar/yen continues its break higher and the Korean won is the star in this move. Post Japanese elections, the reality of trying to pass a new BOJ law and the risk for the JGB market are likely to tamper the hype, until then we can still move higher," Societe Generale analysts said in a note.

"Hedge funds and the likes need this year end run to round up what has been a difficult year."

Tokyo's Nikkei average rallied 1.3 percent to its highest level since May 2, while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent and Australian shares advanced 1 percent.

The won scaled a 16-month high against the Japanese currency and South Korean shares gained 0.5 percent.

Overnight, U.S. stocks ended modestly higher but volume was one of the year's lowest on the day ahead of the U.S. Thanksgiving holiday.

U.S. manufacturing grew in November at its quickest pace in five months, with a rise in domestic demand hinting that factories could provide a boost to economic growth in the fourth quarter, while those from Europe are due out later on Thursday.

HIGH HOPES

European shares rose for a third straight session as investors positioned for a positive outcome to negotiations over aid to Greece after German Chancellor Angela Merkel said a deal to release emergency aid to Greece was still possible next Monday when euro ministers meet.

The expectations of a Greek deal helped the euro rebound to a two-week high against the dollar, after being initially sold off after international lenders to Greece failed to reach a deal to release the aid.

The single currency was up 0.2 percent versus the greenback at $1.28590, and climbed to a near seven-month high of 106.27 yen, bringing into view the April high of 108.00.

"Efforts to avert a Greek default may provide short-term relief for the euro, but the measures will only help to buy more time as Greece persistently seeks further external assistance," said David Song, currency analyst at DailyFX, who is maintaining a bearish view on the single currency.

(Additional reporting by Ian Chua in Sydney; Editing by Michael Perry)