Yen falls, Nikkei surges as Japan gets a new gov't

The yen fell to a 20-month low against the dollar, buoying the benchmark Nikkei stock average to nine-month highs, as Japan swore in a new prime minister eager to pursue drastic stimulus steps to drive the country's economy out of deflation.

Asian shares and other assets were capped in thin holiday trade, with investors focusing on the fate of US negotiations to avert a budget crunch looming at the end of the year.

Markets in Singapore, Malaysia, Indonesia, the Philippines and South Korea reopened after closing on Tuesday for the Christmas holiday.

Hong Kong and Australia remain closed. Europe also will not trade, but US markets reopen later in the day.

MSCI's broadest index of Asia-Pacific shares outside Japan was little changed. Shanghai shares were flat, but stayed in positive territory on the year after a 2.5 percent jump on Tuesday erased 2012 losses. It is set for a first annual gain in three years. South Korean shares ended nearly flat.

Shinzo Abe, whose party won a landslide victory in an election earlier this month, was elected Japan's premier on Wednesday. Abe, who is expected to appoint his cabinet later Wednesday, is calling for a mix of aggressive monetary policy easing and big fiscal spending to beat deflation and rein in the strong yen.

He has kept up pressure on the Bank of Japan to be more drastic and adopt a 2 percent inflation target to beat deep-rooted deflation, pushing the yen to a 20-month low of 85.38 yen on trading platform EBS on Wednesday. Traders eyed the dollar's 2011 high of 85.53 yen as the next target.

The euro rose as high as 112.55 yen on EBS, just below its 16-month high of 112.59 yen hit on December 19.

The weaker yen has bolstered hopes for better earnings from Japanese companies and underpinned the Nikkei, which has gained some 18 percent since mid-November when the election was scheduled, fuelling expectations for Abe's party to win. The yen has lost nearly 8 percent against the dollar in the same period.

The Nikkei closed at a nine-month high with a 1.5 percent gain.

Japanese government debt prices fell, with the 10-year bond futures hitting a three-month low of 143.65 in active trade. Ten-year JGB yields rose 1.5 basis points to 0.780 percent, matching a six-week high hit on December 19.

Minutes of the BOJ's policy-setting meeting in November, released on Wednesday, showed that some board members said the central bank must act decisively, without ruling out any policy options, if the outlook for the economy and prices worsens further.