* MSCI Asia ex-Japan, Nikkei set for best year since 2005
* Yen hits lowest since Aug 2011 vs dollar
* Japan steps up stimulus drive, data undershoots forecasts
* U.S. strives for last-ditch effort to avoid fiscal crisis
* European shares likely flat to higher
By Chikako Mogi
TOKYO, Dec 28 (Reuters) - The yen fell to its lowest level
in more than two years on Friday, lifting Japanese stocks to
21-month highs on expectations of drastic monetary easing, while
shares in the rest of Asia rose as Washington races to avoid a
U.S. President Barack Obama and lawmakers are launching a
last round of budget talks before a New Year deadline to reach a
deal or watch the economy go off a "fiscal cliff," that
economists fear will push the United States back into recession
and stamp out fragile signs of recovery elsewhere.
"A big issue is being made of it, but eventually they'll do
something to kick the can down the road," said Steven Robinson,
senior investment manager at Alleron Investment Management in
European shares were seen flat to higher, with financial
spreadbetters predicting London's FTSE 100, Paris's
CAC-40 and Frankfurt's DAX would open little
changed to as much as 0.3 percent higher. U.S. stock futures
suggested a steady Wall Street start.
MSCI's broadest index of Asia-Pacific shares outside Japan
rose 0.5 percent, hovering around a near
17-month high. It has gained about 18.7 percent this year, a
sharp turnaround from an 18 percent plunge in 2011.
Australian shares rode iron ore stocks up to finish
at a 19-month high, with a recovery in battered mining shares
driving the market to its strongest annual gain since 2009. Hong
Kong shares hovered near a 17-month high with a 0.1
percent gain and Shanghai shares jumped 0.8 percent.
Oil prices rose on hopes the United States would resolve the
fiscal cliff, easing concerns about weakening demand.
Brent crude was up 0.4 percent to $111.25 a barrel
and on course to post a full-year increase of about 3.6 percent,
which would be its smallest gain in four years. U.S. crude
rose 0.5 percent to $91.30, set for its first yearly loss
in four years.
"The U.S. fiscal cliff will continue to direct crude prices
until it's resolved," said Natalie Rampono, a commodities
analyst at ANZ in Melbourne.
As well as being deadline day for the fiscal cliff, Dec. 31
is the date the federal government is set to reach its $16.4
trillion debt limit. The Treasury will have to take measures to
buy time for the government to approve a rise in the debt
A similar political stalemate over raising the federal debt
limit in the summer of 2011 raised fears over a U.S. default,
and prompted Standard & Poor's to strip the U.S. of its
top-notch credit rating, causing turmoil in financial markets.
Asian bond issuance jumped to $133.8 billion so far this
year, eclipsing the previous year's tally of $76.34 billion, as
retail investors stepped up purchases of the region's corporate
bond. Those bonds have returned nearly 20 percent this year,
outshining Asian equities.
JAPAN REMAINS IN FOCUS
Under the leadership of Prime Minister Shinzo Abe, who took
office earlier in the week, Japan is speeding up efforts to turn
around its economy, battered for decades by its strong currency
and persistent deflation.
A survey on Friday showed Japanese manufacturing activity
contracted in December at its fastest pace in more than three
years while core consumer prices fell last month and industrial
output plunged 1.7 percent in November from October.
Abe's repeated calls for "unlimited" monetary easing and
policies aimed at reducing the yen's strength have bolstered
expectations of a sustained period of yen weakness. This has
lifted the mood in Japanese stocks as a weaker yen improves
earnings prospects for the country's exporters.
The benchmark Nikkei average closed up 0.7 percent
at a 21-month high, ending 2012 with the sharpest yearly gain
since 2005. Japanese markets will be closed for New Year's
holidays and will resume trading on Jan. 4.
"The Japanese equity market has turned positive, providing
good sentiment for global investors, with many making money and
putting the money into commodity markets such as oil market,"
said Tetsu Emori, a commodity fund manager at Astmax in Tokyo.
The dollar climbed to its highest since August 2010 of
86.64 yen on Friday. The yen is on track for a drop of
more than 12 percent this year, its steepest since 2005. The yen
also fell to a 17-month low against the euro at
114.675 yen on EBS on Thursday.
The Australian dollar hit a 20-month peak against the yen
of around 89.83 yen, according to Reuters data.
The Japanese government will compile spending requests for a
stimulus package on Jan. 7 and finalise the proposal shortly
thereafter as Abe tries to quickly enact his agenda of increased
public works spending to boost the economy.