TOKYO (Reuters) - The Nikkei average is expected to open stronger and test a 20-month high on Thursday, led by exporters, as the new Japanese prime minister's vow to battle deflation and a strong currency sent the yen to a more than two-year low against the dollar.
Separately, Finance Minister Taro Aso said Prime Minister Shinzo Abe has ordered him to compile a stimulus package without adhering to a previously agreed cap on new bond issuance, signaling a more aggressive policy to kick-start the ailing economy.
The Nikkei .N225 is likely to trade between 10,250 and 10,400, strategists said, while Nikkei futures in Chicago closed at 10,330 on Wednesday, up 0.9 percent from the Osaka close of 10,240.
"The Nikkei will test the year-to-date's high. Nikkei futures already cleared above 10,300 in yesterday's night session," said Takashi Hiroki, chief strategist at Monex Inc. "The yen depreciation continues."
Hiroki said expectations of further gains in the new year would likely deter investors from sharp profit-taking on Friday, the last trading day of the year.
The yen was quoted at 85.50 to the dollar on Thursday after hitting a more than two-year low of 85.735 yen on Wednesday.
On Wednesday, the Nikkei climbed 1.4 percent to 10,230.36, hitting a nine-month high and coming close to this year's high of 10,255.15 reached in late March. The broader Topix .TOPX index advanced 1.2 percent to 847.71.
The benchmark Nikkei has rallied 18.1 percent over the past six weeks, taking the year-to-date gain for the Nikkei to 21 percent, outpacing a 12.9 percent rise in the U.S. S&P 500 .INX and a 14.7 percent gain in the pan-European STOXX Europe 600 .
Japanese equities carry a 12-month forward price-to-earnings ratio of 12.6, slightly cheaper than the S&P 500's 12.8 but more expensive than STOXX Europe 600's 11.5, data from Thomson Reuters Datastream showed.
> Wall St drops for 3rd day, led by retailers .N > Yen falls sharply as Japan's Abe vows to weaken it (FRX) > Treasuries gain as U.S. fiscal deadline approaches <US/> > Gold up in thin post-Christmas trade; US budget in focus<GOL/> > Oil jumps to 9-week high on U.S. fiscal talks, technicals<O/R>
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Reporting by Dominic Lau; Editing by Chris Gallagher