Japanese stocks scaled seven-year highs on Wednesday on growing expectations Prime Minister Shinzo Abe will postpone a planned sales tax hike to avoid damaging a fragile recovery, and call a snap election to bolster his political standing.
Equity markets in the rest of Asia moved little after a flat close in a holiday-thinned Wall Street session, with MSCI's broadest index of Asia-Pacific shares outside Japan off just 0.1 percent in early trade.
Japan's Nikkei rose 0.8 percent to hit a fresh seven-year high.
The Sankei newspaper, citing unnamed government and coalition officials, said Abe will delay a planned second sales tax increase by a year and a half and take the issue to voters. Abe on Tuesday said he had yet to decide on the timing of an election.
Abe has said he will make up his mind on the tax increase after assessing the July-September GDP data due next Monday, widely expected to highlight the fragility of the rebound following a sharp contraction in the second quarter.
The first increase in the two-stage sale tax hike in April knocked the Japanese economy hard, and markets view a delay in the second-phase of the tax hike as positive for growth.
A snap election could cement Abe's grip on power because opposition parties are too fragmented to win, despite a decline in the prime minister's approval ratings.
"Short-term players are jumping onto this, although in the long run, this just means a delay in fiscal reform and not necessarily positive," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
Indeed, Japanese government bond prices fell as a delay in the planned tax hike would heighten doubts on whether Tokyo can achieve its fiscal target to balance the budget outside debt payments by 2020.
The 10-year Japanese Government Bond yield rose to one-month high of 0.515 percent, up 3.5 basis points from Tuesday close.
However, given massive bond-buying by the Bank of Japan, investors see limited room for further rises in JGB yields.
The yen, which has remained under pressure for nearly two years due to the BOJ's aggressive stimulus, was on the back foot.
The greenback traded at 115.80 yen, having risen to a seven-year high of 116.11 yen on Tuesday.
The dollar lost a bit of steam against other currencies, as investors took profits from its hefty gains in the last few months.
The euro traded at $1.2477, keeping some distance from a two-year low of $1.2358 hit on Friday.
In the energy market, Brent crude futures in London closed down 67 cents on Tuesday, or 0.8 percent, at $81.67 a barrel after hitting a four-year low of $81.23. U.S. crude fell 0.7 percent in Asia on Wednesday.
Some analysts said Brent fared worse on Tuesday because of growing expectations that global producer group OPEC will not cut output.
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