The yen hit a 20-month low against the dollar Tuesday as Japan's incoming prime minister stepped up pressure on the Bank of Japan  to ease monetary policy, while the dollar was buoyed by uncertainty about U.S. budget talks.

The Japanese currency still held above major chart support levels, thanks in part to slow activity with many trading centers closed for Christmas, Reuters reported.

The dollar rose as high as 84.965 yen, its peak since April 2011, before giving up gains to last stand at 84.84 yen.

Japan's Nikkei rebounded after a three-day weekend with a 1.1 percent gain, recapturing the key 10,000 mark it ceded on Friday after the latest impasse in U.S. “fiscal cliff” talks sparked a broad market sell-off and the Tokyo benchmark closed down 1 percent. The Nikkei was likely to be supported as long as the yen stayed weak.

"Ongoing optimism about the weak yen is lifting hopes that exporters' earnings will be better than expected," Hiroichi Nishi, general manager at SMBC Nikko Securities, told Reuters.

Analysts say a near-term correction may be possible as the Nikkei is now in "overbought" territory after gaining 16.2 percent over the last six weeks, hitting a nine-month high last Friday. Its 14-day relative strength index was at 72.34, above the 70 level that signals an overbought condition.

MSCI's broadest index of Asia-Pacific shares outside Japan nudged up 0.1 percent, driven higher by surging Shanghai shares, as most Asian bourses were shut for Christmas.

The Shanghai Composite Index soared over 2 percent to five-month highs as investors bought property stocks on mounting optimism about the sector. Taiwan shares jumped 1.3 percent on gains in technology and financial shares.

Shinzo Abe, who is set to become Japanese prime minister on Wednesday, wants the BOJ to adopt a higher, more explicit inflation target.

Abe also threatened to revise a law guaranteeing the BOJ's independence should his demand for a binding 2 percent inflation target - double its current goal - not be met in January, Reuters reported.

He said he will pick someone who agrees with his views on the need for bolder monetary easing to succeed BOJ Governor Masaaki Shirakawa when his term expires in April.

While the prospect of a radical change in BOJ policy is likely to keep the yen under pressure, it was supported at its 200-week moving average around 84.95 yen.

More major support is also seen at 85.53, its April 2011 trough.

"While we have no reason to buy yen now, there's no denying the yen's fall has been driven by speculators and expectations," said Makoto Noji, senior strategist at SMBC Nikko Securities.

"But at the end of the day, whatever the inflation target the BOJ has, there's not so much the BOJ can do, other than buying government debts for more easing. So at some point, traders will take money off this (yen-selling) trade," he added.

The dollar index stood flat at 79.659, near its 10-day high of 79.71 hit on Monday. In one positive technical sign, the index rose above tenkan line on the daily Ichimoku chart, which stood at 79.52 on Tuesday.

The euro traded at $1.3181, down from its 7 1/2-month high of $1.33085 hit last week, but little changed on the day.