Nikkei at eight and a half month high on weak yen, most Asian shares drop

The Liberal Democratic Party of Japan's election triumph drove the yen to a 20-month low against the dollar that propelled the Nikkei stock average <.N225> to a 8-1/2-month closing high on expectations Japanese firms will have much better export earnings.

But regional bourses succumbed to profit-taking from last week's rally as investors wound down positions ahead of the holiday season amid worries that Washington won't avert the "fiscal cliff" of tax hikes and spending cuts that could hurt the U.S. and global economy.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dropped 0.5 percent, snapping an eight day winning streak.

European shares were expected to start higher, with financial spreadbetters predicting London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX will open as much as 0.4 percent up. A 0.3 percent gain in U.S. stock futures hinted at a firm Wall Street open.

Shanghai shares rose 0.3 percent rise after the official Xinhua news agency said on Sunday that China pledged to maintain steady economic policies in 2013, leaving room for maneuver in the face of global risks while deepening reforms to support long-term growth.

On Friday, the Shanghai Composite Index soared 4 percent and Hong Kong shares rose to a 16-month peak.

This year's resolution of a leadership contest in Beijing "is positive for the Chinese market," said Martha Wang, portfolio manager of Fidelity's China Focus Fund. "There are many companies with strong fundamentals, which have been indiscriminately punished by political uncertainty, trading at attractive valuations."

Aiming to restore confidence in the mainland's stock markets - which have markedly lagged Asian peers in recent rallies - China's foreign exchange regulator has removed the $1 billion limit for foreign sovereign wealth funds, central banks and monetary authorities buying Chinese assets through the Qualified Institutional Investor Programme.

Australian shares fell 0.2 percent in thin trade, but the resource sector found support from firm iron ore prices, which had helped the market reach a 17-month high last week.

"There is a bit of money coming out of the high-yielding stocks like banks and coming into resources," Jamie Elgar, dealer at Burrell & Co, said of Australian shares.

In the U.S., Republican House Speaker John Boehner edged slightly closer to President Barack Obama's key demands on Sunday but differences remained two weeks before the December 31 deadline.

CHANGE OF GUARD IN JAPAN

The LDP surged back to power in a landslide election victory on Sunday, giving Japan's next Prime Minister Shinzo Abe a chance to push his radical economic strategy calling for "unlimited" monetary easing and huge public works spending to bring the country out of decades-long deflation.

Abe, who plans to form his cabinet on December 26, said on Monday he wants the central bank to take into account the fact that the public supported his views on monetary policy when it hold a policy meeting on December 19-20.

The Bank of Japan is widely expected to take further easing steps, but hold off from drastic measures until after the new cabinet is formed, analysts have said.

Analysts have predicted the yen will keep its weak trend underpinning equities, while the rise in stocks was unlikely to sharply raise the benchmark 10-year Japanese government bond yield.

The 20-year JGB yield rose to an eight-month high of 1.710 percent after the election, but the 10-year yield was flat at 0.73 percent.

The dollar rose as far as 84.48 yen in early Asia, its loftiest since April 2011, before slipping back to 84, but still above late New York levels on Friday. The euro jumped more than 1 yen to well above 111 yen, a 7-1/2-month high, early on Monday and last traded at 110.57 yen.

"I think that the policies that Abe plans to introduce will only serve to weaken the yen even further. If there is an unwinding opportunity, it will likely be short-lived, maybe falling back to 82 or so on the USD/JPY," said Neal Gilbert, market strategist at GFT Forex.

Gilbert said the yen weakness will continue because Abe is likely to choose a BOJ governor who shares his policy ideas when the term of Gov. Masaaki Shirakawa ends in April.

The yen will also stay pressured if the U.S. recovery nudges Treasury yields higher to underpin the dollar.

The U.S. economy will stay on a moderate growth path next year amid lackluster consumer spending and weak business investment, according to a survey published on Monday by the National Association for Business Economics.

With the change of guard in Japanese politics drawing so much attention globally, some worry about the potential implications for financial relations between Tokyo and its key ally, the United States.

"What are the potential negative effects of decisive action to weaken the yen? How this impacts Japan's relationship with the U.S. directly, and China in a different complex way, will have to be defined as it evolves," said Richard Hastings, macro strategist at Global Hunter Securities.

U.S. crude was up 0.3 percent to $86.98 a barrel and Brent inched up 0.1 percent to $108.27.

(Additional reporting by Victoria Thieberger in Melbourne and Vikram Subhedar in Hong Kong; Editing by Richard Borsuk)