(Corrects lead to say yen hit lowest level)
* 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
By Chikako Mogi
TOKYO, Dec 28 (Reuters) - The yen hit its lowest point in more than two years on Friday, on strong expectations of drastic monetary easing, underpinning Japanese equities, while Asian shares were capped by worries the United States may run out of time to avoid a fiscal crunch.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent. It has gained about 18 percent this year, a sharp turnaround from an 18 percent plunge in 2011.
Australian shares rose 0.6 percent and were on track to post their strongest annual gain since 2009, with resources supported by rising iron ore prices. South Korean shares opened 0.1 percent lower.
European shares were nearly flat overnight, and U.S. stocks marked a fourth straight session of losses.
"A U.S. fiscal deal is unlikely to be reached this year, but the stock markets will not fall sharply because a partial deal could be reached early next year," said Laurence Kim, an analyst at Woori Investment & Securities.
U.S. lawmakers on Thursday gave themselves a last chance to prevent the United States from plunging off a "fiscal cliff" by setting up a late session in Congress a day before taxes are due to rise for most working Americans.
The so-called fiscal cliff, a $600 billion combination of higher taxes and spending cuts, threatens to push the world's largest economy into recession, and stamp out fragile signs of recovery elsewhere.
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 ceiling.
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 a turmoil in financial markets.
U.S. crude futures rose 0.6 percent to $91.38 early on Friday after easing overnight on concerns that a failure to reach a budget compromise would hurt U.S. demand for oil.
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 deep-rooted deflation.
A survey on Friday showed Japanese manufacturing activity contracted in December at its fastest pace in more than three years.
Other data were also grim, with core consumer prices falling in November and industrial output plunging 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 opened up 0.8 percent after closing at its highest since March 2011 on Thursday. It is on track to log its best yearly gain since 2005.
The dollar climbed to its highest since August 2010 of 86.64 yen on Friday. The yen is on track for a drop of 12 percent this year, its steepest since 2005. The yen also fell to a 17-month low against the euro at 114.66 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. (Additional reporting by Umesh Desai in Hong Kong and Hyunjoo Jin in Seoul; Editing by Daniel Magnowski)