HONG KONG - Asian markets rose Tuesday, led by Tokyo after a survey of Japanese business confidence hit a five-year high, but gains were capped as the US government edges closer to partial shutdown because of a budget stand-off.
The dollar bounced back from Monday's lows in Japanese currency trade despite the impasse in Washington that President Barack Obama has warned will hit a budding recovery in the world's biggest economy.
Investors also took heart from data showing Chinese manufacturing activity at its strongest in 17 months, adding to hopes a slowdown has come to an end.
Tokyo rose 0.55 percent, Seoul was 0.74 percent higher and Singapore gained 0.77 percent while Sydney was up 0.14 percent. Hong Kong and Shanghai were closed for a public holiday.
The Japanese central bank's quarterly Tankan survey surged to its strongest level since December 2007 with a reading of "plus 12" from "plus 4" in its last survey, showing that major manufacturers are confident about future prospects.
Eyes are also on a news conference later in the day, when Prime Minister Shinzo Abe is expected to announce a sales tax hike seen as crucial to cutting Tokyo's huge national debt but which critics say could derail a recovery in Japan.
The premier is also expected to unveil a stimulus package to help soften the blow, which has put downward pressure on the yen.
In early Tokyo trade the greenback traded at 98.35 yen (S$1.25), up from 98.21 yen in New York and much stronger than the levels around 97.80 yen seen in Tokyo on Monday.
The euro bought US$1.3521 (S$1.70) compared with $1.3524, while it also fetched 133.07 yen against 132.81 yen.
Investors have almost resigned themselves to a US shutdown as Republicans and Democrats remain unable to reach a deal to pass a new budget before a midnight deadline.
Failure to agree will see about 800,000 federal staff told to stay at home, leading to the closure of numerous agencies in the first shutdown since 1996.
Obama accused Republicans of holding America to ransom with their "extreme" political demands for his flagship healthcare law to be delayed for a year before they give the go-ahead to any budget.
"A prolonged shutdown could have a major impact on confidence and on the US economy, and will likely see a delay in the release of (US) employment figures," Tracey Warren of CMC Markets Stockbroking, told Dow Jones Newswires.
Adding to the sense of crisis, the two sides appear unlikely to reach a deal to lift the US borrowing limit by mid-October, when the government runs out of cash, leaving it unable to service its debts and in turn possibly default.
On oil markets, New York's main contract, West Texas Intermediate for delivery in November, was down six cents to $102.27, while Brent North Sea crude for November eased 19 cents to $108.18.
Gold cost $1,328.00 at 0200 GMT compared with $1,340.86 on Monday.