Asian stocks edged up on Thursday as investors bet government stress tests of U.S. banks will bring the ailing industry closer to a fix, while the dollar extended its rally against the yen.
Mounting economic damage and prolonged political uncertainty in Japan have tarnished the yen's safe haven reputation, sending investors back into the dollar despite America's own economic troubles.
An upward trend in late-maturity U.S. Treasury yields, an overnight decline in gold to around $950 an ounce and more stable credit markets have also enticed some investors to trim their low-risk trades and look for value in higher-risk assets like equities.
However, the price action in Asia lacked firm conviction as regional exports continue to slump amid the global slowdown and corporate earnings prospects recede rapidly.
There is just too much uncertainty out there, said Martin Angel, dealer at Patersons Securities in Australia. It is basically making a lot of people retreat to the sidelines.
Japan's Nikkei share average <.N225> rose 1.1 percent, with automaker stocks like Honda Motor Co <7267.T> and Nissan Motor Co <7201.T> benefiting as yen weakness increased their trade competitiveness.
The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> edged up 0.8 percent, up for a second day after hitting a three-month low on Tuesday.
The index has been holding up better in recent weeks than the all-country world equities index amid persistent market turmoil. On a 30-day rolling basis, the regional index has slipped 3.3 percent compared with the world index, which has fallen 9.7 percent.
Earnings expectations for companies in the MSCI Asia-Pacific ex-Japan index have tumbled 9.6 percent in the last month, the biggest decline since the financial crisis began more than a year ago, according to Thomson Reuters data.
Meanwhile, falling stock prices in the same period have not kept pace with the changing outlook, causing 12-month forward price-to-earnings ratios, a commonly used tool for measuring valuation, to rise a bit.
Hong Kong's Hang Seng index <.HSI> underperformed the region, falling 0.8 percent in quiet trade.
U.S. stocks struggled for direction overnight, ultimately falling late in the session after U.S. President Barack Obama warned of stricter regulation of Wall Street, language that is almost always interpreted in the market to mean leaner corporate profits.
U.S. banking regulators on Wednesday launched a stress test program to assess the largest banks' ability cope with the possibility of a deeper recession in which the unemployment rate climbs above 10 percent next year.
Though the scenario was dire, the action offered a modicum of comfort to investors.
However, Sebastien Barbe, a strategist with Calyon in Hong Kong, pointed out the stress tests may not end before October and economic data were only getting worse.
Whereas the doom and gloom is continuing to unfold in the U.S. and Europe, a devastating shockwave has now reached Asias exporting and manufacturing sectors. This will likely continue to cap the markets in the short term, he said in a note.
Continued uncertainty has not stopped dealers from unloading their yen. The dollar was up 0.4 percent to 97.76 yen, after touching a 3-month high around 97.88 yen earlier in the morning.
The Australian dollar strengthened to a near two-month high against the yen, at 63.69 yen.
Gold was steady at $953.10, though was still vulnerable to aggressive profit taking after soaring to an 11-month high of $1,005.40 an ounce last week.
Government bond markets were quiet, with the yield of the benchmark 10-year U.S. Treasury note essentially unchanged from late New York at 2.93 percent. The yield has risen about 70 basis points since the year began.
The March 10-year Japanese government bond future inched up 0.1 point, having fallen for two straight sessions.
U.S. crude oil rose 25 cents to $42.74 a barrel after jumping 6 percent overnight after data showed a larger-than-expected drop in gasoline stocks. Brent crude gained $1.79 to settle at $44.29 a barrel.
(Additional reporting by Simone Giuliani in MELBOURNE; Editing by Kim Coghill)