Japanese stocks finished at a fresh eight-month high on Monday, as the yen weakened following Shinzo Abe's return to power as Prime Minister of Japan, while stocks in mainland China continued to gain after Friday's strong performance.
In the final week of trading before Christmas, the focus was on Asia's two largest economies, as investors in both China and Japan digested developments over the weekend.
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The U.S. dollar rose to its strongest level against the yen since April 2011 early Monday, to as high as ¥84.48, after the Liberal Democratic Party won a landslide victory in Japan's general election on Sunday. The greenback pulled back from its peak, but remained up on the day at ¥83.90 compared with ¥83.52 late Friday in New York.
The LDP's victory was largely expected, with the yen softening during the buildup to the election amid expectations that the new government will introduce aggressive monetary easing. Over the last five weeks, the U.S. dollar had advanced 5.1% against the Japanese currency.
"Policy may be looser, but maybe not as loose as some in the market think it will be. And if that is the case, it could be hard for the yen to keep on moving down," said Paul Mackel, head of Asian currency research for HSBC in Hong Kong.
Betting against the Japanese currency is becoming an increasingly popular trade, as data from the International Monetary Market showed that noncommercial yen short positions rose to their highest level since July 2007, as of December 11.
The election results, along with the weaker yen, provided a lift for Japanese stocks, with the Nikkei Stock Average up 0.9% at 9828.88. The index has been a major beneficiary of the weaker yen, with the local market climbing 13.4% since mid-November.
Once again, exporters gained on the weaker yen: industrial robotics company Fanuc Corp. was 1.4% higher and Komatsu added 2.3%.
Utilities were a major beneficiary of the LDP victory, with Tokyo Electric Power soaring 32.9%, as the new ruling party is discussing restarting the nation's idle nuclear power plants. Kansai Electric Power also shot up 17.7%.
Stocks in mainland China were also higher, with the Shanghai Composite up 0.5% at 2160.34, as the market added to Friday's gains—its best day of trading since October 2009, up 4.3%.
Friday's sharp moves anticipated the Central Economic Work Conference, held over the weekend, where senior officials said that their top economic priority is to ensure that domestic demand comes to the fore, reducing dependence on exports and investing in state-owned companies.
"Cues from the annual Central Economic Work Conference are certainly a positive for the market but we expect gains to be capped as the specifics are pretty much within market expectations and don't really carry anything new," said Jacky Zhang, an analyst at Capital Securities.
Although the Shanghai Composite remains Asia's worst performing major market, it has staged a substantial rally in recent weeks, after hitting a multiyear low early in December. The index has since recovered, rising 10.3% from its most recent trough on December 3.
Hong Kong's Hang Seng Index was down 0.4% at 22513.61 in lackluster trading, following other regional markets that slipped on Monday given a lack of positive catalysts over the weekend and amid lingering uncertainty over U.S. fiscal cliff negotiations. But with the broad MSCI All Country Asia Ex-Japan rising 16.1% up to Friday, the region's stocks are close to recovering all of the 16.8% decline the index suffered in 2011.
Australia's S&P/ASX 200 was down 0.2% at 4573.40, as selling in high-yield stocks offset strength in mining stocks. Banks such as Commonwealth Bank of Australia and Australia & New Zealand Banking Group were down 0.6% and 0.7% respectively.
Major miners however, pushed forward due to a gain in iron ore prices brought about by positive Chinese manufacturing data late last week. Fortescue Metals Group was up 3.7% and Rio Tinto added 0.8%.
South Korea's Kospi Composite slipped 0.6% to 1983.07.
Write to Daniel Inman at daniel.inman@wsj.com
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