TOKYO The yen hovered near fresh lows against the dollar and Tokyo stocks jumped back near a 33-month high on Tuesday after markets took comments from a U.S. official as giving Japan the green light to pursue policies that weaken the yen as long as they help beat deflation.
Asian shares were steady, with many regional bourses shut for holidays. Encouraging trade data from China late last week was lending support but non-Japan markets lacked momentum as investors awaited key events such as the U.S. president's State of the Union address for trading cues.
While Japan has faced some criticism from German and other European officials that it is intentionally trying to weaken the yen with monetary easing, rhetoric about a so-called currency war was dialled back ahead of a Group of 20 meeting in Moscow on Friday and Saturday.
U.S. Treasury Undersecretary Lael Brainard said on Monday the United States supports Japanese efforts to end deflation. But she also mentioned that the G7 has long committed to exchange rates determined by market forces, "except in rare circumstances where excess volatility or disorderly movements might warrant cooperation.
European Central Bank council member Jens Weidmann also said the euro was not overvalued at current levels.
The dollar was trading at 94.22 yen after marking on Monday its highest level since May 2010 of 94.465. The euro was trading at 126.28 yen after the yen fell 2 percent against the euro on Monday, pushing it back towards 127.71 yen hit last week, its highest level since April 2010.
"I think the yen's weakening is a function of (playing)catch-up," and not Japan resorting to deliberate devaluation of its currency, said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.
"It's the market's way of saying: we're convinced there is a movement afoot to reinflate Japan."
The weaker yen in turn helped bolster sentiment for Japanese stocks, sending the Nikkei average 2.6 percent higher.
"While currency moves have been sensitive to officials' comments in general, people thought any comment from the G20 would trigger yen buying," said Hiroichi Nishi, an assistant general manager at SMBC Nikko Securities.
"But such worries are receding as she (Brainard) said she supports Japan's efforts to end deflation."
The yen is expected to stay under pressure on expectations that Prime Minister Shinzo Abe will endorse a far more dovish Bank of Japan regime when the current leadership's term ends next month. The BOJ is expected to refrain from taking fresh easing steps when it meets this week.
The MSCI's broadest index of Asia-Pacific shares outside Japan was little changed. Australian shares inched up 0.1 percent led by financials, as investors waited for corporate earnings results.
Trading resumed in Japan and South Korea but markets remained closed in Singapore, Hong Kong, mainland China, Malaysia and Taiwan.
G20 officials said on Monday the Group of Seven nations are considering a statement this week reaffirming their commitment to "market-determined" exchange rates.
Currency and equities markets were also looking ahead to President Barack Obama's State of the Union address later on Tuesday, for any signs of a deal to avert automatic spending cuts due to take effect on March 1.
"We believe that the G20's take on currency wars, Mr. Obama's upcoming state of the union address, and data on the current condition of the US economy should help markets assess where the global recovery stands and where we are heading," Barclays Capital said in a research report.
Wall Street and world equity markets were little changed in light volume on Monday as a lack of major economic news gave investors little incentive to push prices higher after a robust performance last week.
U.S. and Chinese data last week lifted the tech-focused Nasdaq Composite Index to a 12-year closing high and the Standard & Poor's 500 Index to a five-year peak on Friday.
U.S. crude futures edged down 0.2 percent to $96.88 a barrel while Brent steadied around $118.12.
Spot gold stayed near a one-month low.
(Additional reporting by Ayai Tomisawa and Lisa Twaronite in Tokyo; Editing by Edwina Gibbs)