Asian stocks drifted higher on Wednesday as banks extended gains, while Japanese government bonds rose after the Bank of Japan sharply increased the amount of government debt it would purchase to support the economy.
U.S. Treasuries also edged up on speculation the Federal Reserve may take the unorthodox step of buying government debt to push down interest rates as central banks around the world look for new tools to pull their economies out of recession.
Shares of large Japanese banks outperformed the broad market after the Bank of Japan said on Tuesday it would offer $10.2 billion in subordinated loans to lenders to shore up their capital base, as the policy response in the world's second-largest economy continued in steady increments.
The focus quickly shifted to the outcome of a Fed meeting later in the day and whether the U.S. economic conditions warranted additional steps by policymakers to revive lending.
If they can continue to get responses from the market from the other methods they are using in quantitative easing, then they won't buy Treasuries, said Al Clark, head of multi asset, Asia Pacific with Schroders in Singapore.
The minute they buy Treasuries, there is a certain perception associated with that, which might hit the dollar.
Gains in U.S. stocks overnight after an unexpected jump in housing starts buoyed sentiment, but investors were cautious over whether the rally was sustainable amid gloomy forecasts for the global economy and corporate profits.
The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> inched up 0.4 percent after climbing more than 7 percent since the month began.
Twenty-day rolling returns on the index of 4 percent exceeded the 0.7 decline on the MSCI all-country world index <.MIWD00000PUS> and the roughly 3 percent yielded by the 10-year U.S. Treasury note.
Japan's Nikkei share average <.N225> dipped 0.7 percent after briefly trading at a five-week high.
Banks were some of the clear outperformers, with Sumitomo Mitsui Financial Group <8316.T> and Mizuho Financial Group <8411.T> both up 3 percent on hopes the global financial system was stabilizing.
Hong Kong's Hang Seng index <.HSI> rose 1.5 percent, propelled by a 5 percent jump in shares of HSBC <0005.HK>.
Bargain hunters and institutional investors have laid waste to short sellers of Europe's largest lender, with the stock up nearly 40 percent since last week when doubts grew ahead of a massive rights issue.
With the average policy rate among central banks in the Group of Seven rich nations at a mere 0.55 percent but economic data continuing to reflect weakness, investors have zeroed in on what other actions policymakers will take to achieve stability.
The Bank of Japan said on Wednesday it would increase purchases of government bonds by almost a third to smooth market operations as the government prepares more spending to cushion the country's worst recession since World War Two.
The 10-year Japanese government bond futures rose 0.3 point following the BOJ move, while in the cash market the 10-year yield was virtually unchanged on the day.
U.S. Treasuries crept higher as some dealers bet the Fed would lean closer to buying long-dated government debt to pull down interest rates of things like mortgages.
The yield on the benchmark 10-year note ticked down to 2.99 from 3.0 percent overnight in New York. Since the beginning of the year, the yield has risen some 75 basis points but has stopped cold at around 3 percent.
Uncertainty about what the Fed and other policymakers are willing to do has kept investors cautious about diving back into riskier fixed-income products or straying too far from long-maturity government debt.
Having lowered interest rates aggressively, authorities are now turning to less conventional measures such as quantitative easing. The extent and timing of the positive impact of this policy on the economy is not yet known and the short-term effect on markets may be heightened volatility, said Quentin Fitzsimmons, a fund manager at Threadneedle in London.
The euro held close to a recent one-month high on the dollar and briefly forged an 11-week peak against the yen, as increasing tolerance of risk among investors inspired them to leave behind currencies associated with relative safety.
The euro was up slightly on the day at $1.3030 and hovered below Monday's five-week high of $1.3072.
The euro hit its highest since late December at 128.83 yen in early Asian trade but then retreated to stabilize almost unchanged on the day at 128.28 yen.
Gold slipped 0.2 percent to $912.50 per ounce in the spot market, still vulnerable to bouts of profit taking as a global equity market rally kept alive.
U.S. crude for April delivery fell 1 percent to $48.60 a barrel after gaining 2.9 percent overnight after U.S. housing market data showed the biggest monthly gain in starts since 1990.
(Editing by Kim Coghill)