Shares have firmed as optimism over corporate earnings and China's reopening offset concerns the Bank of Japan might temper its super-sized stimulus policy at a pivotal meeting this week, while a holiday in US markets made for thin trading.
The yen climbed to its highest since May after rumours swirled the Bank of Japan (BOJ) might hold an emergency meeting on Monday as it struggles to defend its new yield ceiling in the face of massive selling.
That had local markets in an anxious mood, and Japan's Nikkei slipped 1.3 per cent to a two-week low on Monday.
Yet MSCI's broadest index of Asia-Pacific shares outside Japan added 0.27 per cent, with hopes for a speedy Chinese reopening giving it a gain of 4.2 per cent last week.
And European shares opened positively with the STOXX 600 up 0.1 per cent by 0850 GMT driven by healthcare stocks which gained 0.6 per cent.
Britain's benchmark FTSE index edged close to the record high of 7903.50 it hit in 2018, with banks and life insurance companies among the top gainers.
Earnings season gathers steam this week with Goldman Sachs , Morgan Stanley and Netflix among those reporting.
World leaders, policy makers and top corporate chiefs will be attending the World Economic Forum in Davos, and there are a host of central bankers speaking, including no fewer than nine members of the US Federal Reserve.
The BOJ's official two-day meeting ends on Wednesday and speculation is rife it will make changes to its yield curve control (YCC) policy given the market has pushed 10-year yields above its new ceiling of 0.5 per cent.
The BOJ bought almost five trillion yen ($US39.12 billion) of bonds on Friday in its largest daily operation on record, yet 10-year yields still ended the session up at 0.51 per cent.
Early on Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield stuck at 0.51 per cent.
"There is still some possibility that market pressure will force the BOJ to further adjust or exit the YCC," JPMorgan analysts said in a note. "We can't ignore this possibility, but at this stage we do not consider it a main scenario."
"Although domestic demand has started to recover and inflation continues to rise, the economy is not heating up to the extent that a sharp rise in interest rates and potential risk of large yen appreciation can be tolerated," they added.
The BOJ's uber-easy policy has acted as a sort of anchor for yields globally, while dragging down the yen. Were it to abandon the policy, it would put upward pressure on yields across developed markets and most likely see the yen surge.
The dollar has been undermined by falling US bond yields as investors wager the Federal Reserve can be less aggressive in raising rates given inflation has clearly turned the corner.
The Japanese yen rose to a more than seven-month peak against the dollar on Monday, as market sentiment was dominated by expectations that the BOJ would make further tweaks to, or fully abandon, its yield control policy.
The yen jumped roughly 0.5 per cent to a high of 127.215 per dollar, before easing to 128.6 by 9.15am GMT.
The dollar index, which measures the US unit against a basket of major currencies, recovered from a seven-month low touched earlier in the session to be at 102.6.
Futures now imply almost no chance the Fed will raise rates by half a point in February, with a quarter-point move seen as a 94 per cent probability.
Yields on 10-year Treasuries are down at 3.498 per cent, having fallen six basis points last week, close to its December trough, and major chart target of 3.402 per cent.
Alan Ruskin, global head of G10 FX Strategy at Deutsche Securities, said the loosening of global supply bottlenecks in recent months was proving to be a disinflationary shock, which increases the chance of a soft landing for the US economy.
"The lower inflation itself encourages a soft landing through real wage gains, by allowing the Fed to more readily pause and encouraging a better behaved bond market, with favourable spillovers to financial conditions," Ruskin said.
"A soft landing also reduces the tail risk of much higher US rates, and this reduced risk premia helps global risk appetite," Ruskin added.
Commodities prices, which had rallied last week, dipped on Monday.
The drop in yields and the dollar had benefited the gold price, which jumped 2.9 per cent last week, but the precious metal slipped 0.4 per cent to $US1,911 an ounce in early trading on Monday .
Oil prices slid as a rise in COVID-19 cases clouded the prospects for a surge in demand as China reopens its economy.
Brent crude fell 73 cents, or 0.83 per cent, to $US84.57 a barrel by 8.57am GMT, while US West Texas Intermediate crude CLc1 was down 61 cents, or 0.6 per cent, at $US79.24 a barrel.