TOKYO (Reuters) - Japanese shares surged to multi-year highs on Tuesday as the yen hit a 2-1/2-year low against the dollar the previous day on rising expectations that strong political pressure will prompt the Bank of Japan to deliver bold monetary easing measures.
Other Asian stock markets struggled, with the MSCI's broadest index of Asia-Pacific shares outside Japan giving up earlier gains to ease 0.2 percent.
The pan-Asian index was dragged down by a 0.7 percent decline in South Korean shares, which took a hit from losses in Apple Inc (AAPL.O) suppliers after media reports said the iPhone maker had slashed orders of screens and other components on weaker-than-expected demand.
"Investors (in the Seoul market) are taking profits on the technology sector, which rallied for the past couple of months, while snapping up auto shares which have been lacklustre," said Kim Soo-young, an analyst at KB Investment & Securities in Seoul.
Tokyo shares were the highlight of the session, with the benchmark Nikkei stock average climbing 1.3 percent to its highest level since late April 2010 as the yen remained on a weakening track, helping to improve earnings prospects for exporters.
The Nikkei was in deep "overbought" territory technically, signalling a possible near-term correction.
"Short-term correction is getting more likely given that bullish sentiment ... has become more widespread," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.
Yen-selling activity eased on Tuesday, however, when Japanese Economics Minister Akira Amari said excessive yen weakness could have a negative impact on people's livelihoods through a rise in import prices.
The dollar took a breather, pulling back 1 percent to 88.62 yen, having hit its peak since June 2010 of 89.67 yen on Monday. The euro also eased 1 percent to 118.695 yen, having hit its highest since May 2011 of 120.13 on Monday. Against the Australian dollar, the yen earlier matched its lowest since August 2008 touched on Monday at 94.64.
Many still believe the weak yen trend has more legs.
In a research report, Societe Generale noted that U.S. exports have overwhelmed others in the Group of five -- the United States, Britain, Germany, France and Japan -- in 2012, and concluded the United States was "winning the currency war" while Japan was losing "in a really big way".
"Buying USD/JPY is the obvious conclusion," it said.
The dollar was also underpinned by benchmark U.S. Treasury yields which have been inching higher since late last year.
Among other markets, Australian shares were up 0.1 percent, while shares in Hong Kong were nearly flat and the Shanghai Composite was up 0.4 percent.
Many investors were keeping a cautious watch on U.S. fiscal woes, as well as on the U.S. earnings season amid some worries of potentially slowing profit growth.
Analyst estimates for the quarter have fallen sharply since October. S&P 500 earnings growth is now seen up just 1.9 percent from a year ago, Thomson Reuters data showed.
Federal Reserve Chairman Ben Bernanke on Monday urged U.S. lawmakers to lift the country's borrowing limit to avoid a potentially disastrous debt default, warning that the economy was still at risk from political gridlock over the deficit.
Also on Monday, U.S. President Barack Obama refused to trade cuts in government spending in exchange for raising the borrowing limit. If the limit is not raised, the United States could default on its debt.
After narrowly avoiding the "fiscal cliff" of sharp spending cuts and tax increases just two weeks ago, Obama faces a set of deadlines by the end of February: the need to raise the debt ceiling, automatic deep spending cuts temporarily delayed in the fiscal cliff deal, and the end of a stop-gap government funding measure.
The euro was at $1.3371, slipping from an 11-month high of $1.3404 reached on Monday on fading prospects for an interest rate cut in Europe and easing anxiety over the region's debt crisis.
U.S. crude inched down 0.1 percent to $94.03 a barrel and Brent also eased 0.1 percent to $111.75.
A lacklustre equities market provided for some cautious trading in Asian credit markets, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 1 basis point.
Additional reporting by Hyunjoo Jin in Seoul and Dominic Lau in Tokyo; Editing by Shri Navaratnam