TOKYO (Reuters) - Japanese shares rallied and the yen dropped on Monday after Tokyo won its bid to host the 2020 Summer Olympics, while Asian shares also gained on mildly upbeat Chinese trade data that underscored signs of stability in Asia's powerhouse.
The dollar licked its wounds and U.S. debt yields were off two-year highs after a disappointing U.S. jobs report on Friday, which raised speculation the Federal Reserve may minimise the size of a likely reduction in stimulus many investors expect later this month.
"The data was undoubtedly weak. I suspect the Fed will start tapering this month but maybe they will just trim bond buying by $5 billion a month for now," said a U.S. bond trader at a Japanese bank. The Fed currently buys $85 billion of bonds per month.
Japan's Nikkei share average gained 2.2 percent, hitting a one-month high as investors bet hosting the Olympics would boost the economy -- from construction and higher prices -- by 3 trillion yen over the coming seven years.
"In the short-term, this (Olympics-bid win) will be positive mainly through a boost on Olympic-related shares," said Ryota Sakagami, chief equity strategist at SMBC Nikko Securities in a report.
"In the longer run, its impact depends on how much the government can push for infrastructure investments and promotion of tourism business but it is likely to be positive for the Japanese economy and shares," he said.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7 percent thanks to improved Chinese trade figures released over the weekend.
Hong Kong shares rose 0.9 percent while South Korean shares rose 0.8 percent, both hitting their highest level in about three months.
Mainland Chinese shares also extended gains after positive Chinese August inflation data added to optimism following solid trade figures, with the CSI300 of the leading Shanghai and Shenzhen A-share listings up 2.1 percent.
China's exports grew 7.2 percent in August, above market expectations of a 6.0 percent rise from a year earlier.
China's consumer inflation held steady in August while producer price deflation continued to ease, in another sign of a stabilising economy.
Investors are bracing for more data from China including industrial production and retail sales on Tuesday.
Investors are also grappling with the worry that withdrawal of the Fed's stimulus could destabilise asset prices worldwide.
Despite the soft job data, most U.S. primary dealers expect the Fed to announce at its next policy meeting September 17 and 18 that it will cut the size of its bond purchases, according to a Reuters poll on Friday.
"Although the U.S. job data was disappointing on the whole, the jobless rate fell, inching closer to the 7.0 percent level, which the Fed said is a threshold to end the quantitative easing," said Tohru Yamamoto, chief fixed-income strategist at Daiwa Securities.
"The Fed will start tapering in September, perhaps little by little, like by $10 billion. It is hard to expect bond yields to fall before the next Fed meeting," he added.
The 10-year U.S. Treasury yields stood at 2.949 percent, off a two-year high just above 3 percent hit on Friday, though they had gave up much of the gains made after the job report.
The dollar index stood at 82.25, steadying from Friday's 0.6 percent fall. The euro fetched $1.3175, off Friday's seven-week low of $1.31045.
Against the yen, the dollar briefly rose to as high as 100.11 yen thanks largely its strong correlation to Japanese shares, but quickly gave up gains on profit-taking to stand at 99.55 yen for a gain of 0.4 percent from late last week.
Elsewhere, U.S. crude oil futures slipped slightly but stayed near two-year highs supported by concerns a possible military strike against Syria could stir broader conflict in the Middle East and disrupt oil supplies.
(Editing by Eric Meijer)