(Reuters) - Japan's leading share average rose to a three-week closing high on Wednesday after better-than-expected economic data from the United States and China, although strategists said the rally could stall if the euro holds below 100 yen.    

The data eased concerns over the health of the global economy, boosting Japanese automakers and financials.    

Toyota Motor Corp advanced 3.1 percent and Nissan Motor Co gained 1 percent, while battered Nomura Holdings topped the blue-chip Topix Core 30 list as the biggest percentage gainer, adding 6.9 percent.    

The benchmark Nikkei average gained 1.2 percent to 8,560.11, trading above its 25-day moving average of 8,495, after figures showed that U.S. manufacturing grew at its fastest pace in six months in December. The Nikkei lost 17.3 percent last year.    

The 75-day moving average near 8,589 is seen as the next hurdle for the Nikkei to top before investors can become more confident of a broad rebound in Japanese stocks.    

It looks like the Nikkei is capped at the 75-day average. Whether it can rise above this level will be in focus, said Yoshihiro Ito, chief strategist at Okasan Online Securities. The first four days of trading of the year is always ... a good gauge of investor sentiment in Japan.     

Topix is very strong today and it looks like there is broad buying back by foreign investors, especially European funds after they sold off near the end of last year.     

The broader Topix climbed 2 percent to 742.99.
    
Continuing its recent volatile trading, Elpida Memory  spiked more than 9 percent in heavy morning trade after a Taiwanese trade publication said the troubled chipmaker may merge with Toshiba Corp. It ended up 5.6 percent.    

Toshiba shed 1 percent even as the company denied the report.    

TonenGeneral lost 5.8 percent as investors worried how it would fund a repurchase of most of Exxon Mobil's  50 percent stake in the refiner, after sources told Reuters about the U.S. oil major's plan to retreat from Japan.
    
  
EURO IN FOCUS
   
Despite steady gains on Wednesday, market players said the weakened euro could derail Japan's rally, with the single currency hovering just below 100 yen on Wednesday after hitting an 11-year low of 98.71 yen in thin trading on Monday, when Tokyo markets were closed.   

For now, there are no sharp forex moves, but market participants are focused on the euro/yen rate, and if it cuts
below 100 yen or close to 99 yen the market's gains will shrink, said Kenichi Hirano, operating officer at Tachibana Securities. Foreign exchange rates remain unstable for now and this will continue to pressure Japanese exporters.   

Citing the yen strength's and expensive valuations, HSBC maintained its underweight on Japanese equities in its global allocation.    

The Bank of Japan remains reluctant to inject liquidity; this means the yen is likely to strengthen further, which will likely hurt earnings, HSBC said in a note.   

Japan is expensive relative to other markets and quite well owned by international investors compared to historical levels, it said and had a year-end target for the Topix at 680, which is
8.5 percent below Wednesday's close.   

The Topix carries a similar valuation to the S&P 500, Thomson Reuters Datastream data showed, despite losing 18
percent last year to underperform the U.S. gauge. The Japanese index has a 12-month forward price-to-earnings ratio of 11.6 versus S&P 500's 11.7 and STOXX Europe 600's 9.6.

Meanwhile, most other Asian markets rose on Wednesday as investor risk appetite returned after upbeat U.S. and European economic data improved the global growth outlook, but the euro's gains were short-lived due to deep-set worries over the European debt crisis.

MSCI's broadest index of Asia Pacific shares outside Japan rose as much as 0.9 percent to its highest in nearly a month, before trimming some gains to stand up 0.6 percent. The materials sector outperformed.

The index fell 18 percent in 2011, sharply underperforming Wall Street's S&P 500, which ended the year virtually unchanged, and an 11 percent drop in the FTSEurofirst 300 index of top European shares.

Japan's Nikkei stock average reached a three-week high and was up 1.4 percent, but Hong Kong and Shanghai shares lagged, with lacklustre turnover suggesting investors were cautious, refraining from chasing recent gains and taking profits.

While we are structurally underweight risk, we suggest adopting a more neutral stance in the first two weeks of 2012, analysts at Barclays Capital said in a research note.

We do not expect higher risk premia because risky assets have sold off to a point where they offer interesting excess returns and because it has become expensive to short risk further unless data consistently surprise on the downside.

European markets were likely to open lower, with financial spreadbetters expecting London's FTSE to start down as much as 0.3 percent, Frankfurt's DAX down as much as 0.5 percent and Paris' CAC-40 as much as 0.6 percent lower.

Data released on Tuesday showed U.S. manufacturing grew at its fastest pace in six months in December, while U.S. construction rose to a near 1-1/2-year high in November.

Elsewhere, German unemployment fell sharply to the lowest in two decades, easing concerns that the euro zone debt crisis was putting a drag on global growth. The numbers followed earlier surveys showing Chinese manufacturing and service data topping forecasts and the euro zone's purchasing managers index contracting less than had been feared.

Asian credit markets firmed, with spreads on the iTraxx Asia ex-Japan investment grade index tightening a tad. Positive sentiment may spur an early issuance rush as borrowers seek to take advantage of favourable conditions while they last to meet their 2012 funding needs.

DEBT, ECONOMY DICTATE 2012

The euro eased 0.1 percent to around $1.3035 after posting its biggest one-day rally in nearly two months and reaching a one-week high of $1.3077 the previous day on upbeat data. It hit a 2011 low of $1.2856 on Dec. 29.

The euro also eased 0.1 percent to below 100 yen, but off a trough of 98.71 yen hit on Monday, its lowest since late 2000.

Oil prices slipped but were still largely underpinned by supply disruption concerns as a result of growing tensions between Iran and the West.

Volatility will persist in 2012 given the uncertainty over the course of the euro zone debt crisis and its impact on the global economy, but it will not be as sharp as was in 2011, unless major unforeseen risks to the downside emerge.

The basic structure is unchanged from 2011, that is, developed countries will be undermined by the euro zone debt crisis and its fallouts while developing countries will manage to spur domestic demand, supporting industrialised countries' exports, said Makoto Noji, senior strategist for SMBC Nikko Securities.

Asian equities may face more downside risks should the euro zone crisis come to a critical point, but that would set up the potential for renewed outperformance by Asia, led by China, which would have substantial room to ease, brokerage CLSA said.

Analysts say global economic data and European events will continue to drive markets in 2012, and that investors were expected to remain wary of aggressively taking risks throughout the year.

We expect global economic concerns to begin to dominate as Q1 2012 progresses, Standard Chartered said in a note to clients. This week's highlight is U.S. jobs data due on Friday.

The analysts at Barclays Capital said they would recommend being structurally short the EUR, underweight currencies that are sensitive to European risks, and tactically going neutral (from underweight) risky currencies during times when risk sentiment temporarily improves.

Risks related to the euro zone debt crisis include progress in Greece's fiscal reforms, Italy's refinancing of about 150 billion euros ($195.8 billion) of government debt in February-April alone and the possibility of sovereign credit rating cuts in key euro zone economy.

(Additional reporting by Viparat Jantraprap.)

--