Asian shares outside Japan rose on Friday on optimism economic reform and budget plans unveiled by Spain will help the debt-saddled nation manage its debt imbalances, potentially pre-empting the likely conditions of international assistance.
Riskier currencies such as the Australian dollar, the euro and commodities also edged higher while the dollar remained defensive, with investors cautiously warming up to risk as Spain's latest steps could activate the European Central Bank's bond-buying plan aimed at capping Madrid's high borrowing costs.
Sentiment was buoyed by Spain's announcement on Thursday of a detailed timetable for economic reform and a budget based mostly on sharp spending cuts rather than tax hikes, as Madrid continues to talk with European Union authorities about the terms of a possible aid package.
"It's a move in the right direction because at the very least they have to meet the conditions for the ECB to buy their bonds," said Tetsuro Ii, CEO of Commons Asset Management.
A marginal rise in U.S. stock futures hinted at a steady start on Wall Street, and financial spreadbetters expect London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open as much as 0.7 percent higher.
The MSCI index of Asia-Pacific shares outside Japan rose 0.7 percent, led by the outperformance in Chinese shares, and was set for a quarterly gain of 8.5 percent.
Hong Kong shares rose 0.3 percent and Shanghai jumped 1 percent on hopes China will take measures over the coming long holiday or ahead of the expected leadership transition as early as next month to boost the economy and support domestic stock markets.
The yen hit a two-week high against the dollar of around 77.50 yen on Friday. The dollar index measured against a basket of currencies eased 0.2 percent after losing 0.4 percent on Thursday for its biggest daily drop in two weeks.
The euro rose 0.2 percent to $1.2934, rebounding from a two-week low of $1.2828 touched on Thursday, and the Australian dollar, widely seen as a gauge for investor risk appetite, rose 0.3 percent to $1.0466.
Asian credit markets firmed, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by three basis points.
SPAIN VS CHINA
While Spain's latest move and speculation for Chinese stimulus supported market sentiment on Friday, they also represented vulnerability in the efforts to resolve the euro zone debt crisis and the global economies hit by Europe's woes.
Reflecting choppy market sentiment, the CBOE Volatility index which measures volatility expected in the Standard & Poor's 500 index fell 11.7 percent on Thursday fo r its sharpest daily decline in three weeks, just a day after the index posted its biggest daily rise in 2-1/2 weeks.
"The budget represents two steps forward and one step back, which is why the euro only moved slightly higher," said Mary Nicola, a strategist at BNP Paribas.
Later on Friday, a stress test of Spain's banking sector will be released, which will reveal how much more money is needed to recapitalise its banks. Moody's latest credit rating review is also expected this week.
Shares in Australia, heavily reliant on resources demand from China, inched up 0.2 percent, but were capped on concerns over the economic weakness in the world's second-largest economy, with Fitch Ratings cutting its 2012 growth forecast for China from 8 percent to 7.8 percent on Friday.
"There are a lot of people out there who are very concerned about whether or not the stimulus in China is real or coming through," said Damien Boey, an equity strategist at Credit Suisse.
Japan's Nikkei stock average bucked the rest of Asia and slumped 1 percent amid concerns about falling revenues for local companies in China, hit by recent anti-Japan protests.
Following fresh monetary stimulus unveiled by the United States and Japan this month, markets have retained expectations for China to cut interest rates to spur growth, as weakening demand in China has damaged global economies and weighed on investor sentiment.
Data on Friday showed Japan's industrial output fell more than expected in August as the world's third-largest economy was held back by a strong yen, the euro zone debt crisis and a slowdown in its top export market China.
Thailand, Southeast Asia's second-largest economy, also saw factory output in August falling a bigger-than expected 11.32 percent from a year earlier as faltering global demand weighed, raising the chances for an interest rate cut.
Beijing approved about $150 billion-worth of infrastructure projects this month.
But China's biggest listed steelmaker, Baoshan Iron & Steel Co expressed doubt that attempts to prop up the slowing economy would revive demand in the world's biggest market for the metal. A slump in iron ore prices had triggered a broad sell-off in riskier assets.
Brent crude futures rose 0.3 percent to 112.36 a barrel, as Spain eased investor worries about Europe's fiscal crisis and revived hopes of a recovery in oil demand growth. Worries about supplies from the Middle East also provided support. U.S. crude was up 0.5 percent to $92.32.