Asian stocks gained for a fifth straight day yesterday as hopes emerged the US Federal Reserve may act this month to stimulate the world's biggest economy.
The MSCI Asia Pacific Index increased 1.12 per cent to close at 123.36.
"The market has priced in most of the negative factors, and now it depends on the response from policymakers," Koichi Kurose, the chief economist in Tokyo at Resona Bank, told Bloomberg News. "While the market won't go down easily, to go up it needs a view that appropriate policies will be implemented."
But the gain was not enough to undo all of the losses from a sell-off across Asian and global markets last month, triggered by concerns the world economy may be cooling.
Fuelling the recent rally has been speculation the Fed may be ready to deploy fresh economic stimulus measures when policymakers gather in September.
The Fed discussed how to bolster the country's recovery and private-sector hiring at their latest meeting on August 9, according to minutes released yesterday. The Fed opted at the meeting to keep interest rates at record lows until at least 2013.
But the minutes revealed divisions within the central bank, with some members of the federal open market committee favouring more "substantial" moves.
Any fresh stimulus could include further asset purchases, in effect a third round of quantitative easing. The Fed previously embarked on an unprecedented US$600 billion (Dh2.2 trillion) bond-buying programme in November.
The minutes also showed the Fed had "notably" cut growth forecasts for the rest of this year and next year.
Fears the world economy may be heading into a period of slower growth or even a double-dip recession have escalated in recent weeks.
Worries have been stoked by Standard & Poor's downgrading of the US's top-notch credit rating and anxiety the euro-zone sovereign debt crisis may deepen.
But yesterday, European stocks rallied for a third day, with the Stoxx 600 advancing 1.5 per cent to 234.19 in late morning trading. The rise has helped to cut the index's biggest monthly drop since 2008. Standard & Poor's 500 Index Futures advanced 1 per cent.
In a further boost to confidence, proposals were approved yesterday by the cabinet of Angela Merkel, the German chancellor, to overhaul the European Financial Stability Facility (EFSF), the fund used to bail out troubled euro-zone countries. Ministers in Berlin agreed to the changes, which include expanding the EFSF to allow sovereign bond-buying powers.
The draft will now be introduced to the German parliament on September 5, before politicians vote on the measures on September 29.
Positive data also emerged from the euro-zone's biggest economy. German unemployment fell in August for a 26th straight month. The number of people out of work dropped by a seasonally adjusted 8,000 to 2.95 million and the unemployment rate held at 7 per cent, the lowest since records for a reunified Germany began in 1991, the federal labour agency said.
Inflation in the euro zone remained unchanged last month and unemployment held steady for a second month in July, other data showed.
The inflation rate remained at 2.5 per cent, the European Union's statistics office in Luxembourg estimated.
The seasonally adjusted unemployment rate remained at 10 per cent, a separate report showed.
German retail sales remained unchanged at 4.5 per cent in July, separate data from the federal statistics office showed.