China woes weigh on Asia but Tokyo up ahead of bank decision

Asian shares mostly retreated Tuesday as China's malaise keeps investors on edge ahead of a US interest rate decision later this week, while Tokyo rallied on hopes for fresh measures to shore up the torpid Japanese economy.

With the China-fuelled volatility that has characterised much of the past month's trading eased off, dealers have recovered a little confidence and are drifting back into riskier assets such as emerging market currencies.

The Australian dollar was also given a boost by news that the popular Malcolm Turnbull would replace Tony Abbott as Australian prime minister following a Liberal Party coup Monday.

While the US Federal Reserve's policy meeting on Thursday is the main show this week, the immediate focus of attention is the Bank of Japan's own gathering, which analysts say could see a widening of the country's stimulus.

Despite more than two years of massive government spending and central bank monetary easing, Japan's leaders are struggling to kickstart growth in the world's number three economy with a hoped-for inflation surge also failing.

The tepid outlook comes against a backdrop of global turmoil in the wake of China's yuan devaluation last month, and economists have predicted further bond-buying, effectively printing more yen.

While a move is not guaranteed Tuesday, dealers will be watching to see what bank governor Haruhiko Kuroda has to say at a news conference later in the day about its plans for the future.

"If we see anything from Mr Kuroda and the BoJ today it will be setting the scene for additional measures if they so need," Chris Weston, chief market strategist in Melbourne at IG, said in an e-mail to clients.

"It seems logical that they would want to see the wash up from this week's Federal Reserve meeting and hold the ability to be reactionary."

With a broad consensus that some measures will be taken at some point the yen weakened against the dollar and euro. On Tuesday the greenback was at 120.51 yen, up from 120.18 yen Monday in New York.

- 'Aussie' rallies -

And the European single currency was stronger at 136.22 yen against 136.01 yen.

The weaker yen and hopes for further easing measures boosted Tokyo's Nikkei index, which was 1.33 percent higher by the lunch break.

However, most other regional markets continue to swing as worries about the Chinese economy persist. Shanghai was 1.47 percent lower, Hong Kong was flat and Sydney -- where several firms with links to China are listed -- shed 0.87 percent.

While Australian stocks retreated, the "Aussie" dollar edged up again against the greenback after Turnbull ousted Abbott in a party vote on Monday.

The unit bought 71.46 US cents, up 0.12 percent from Monday and much stronger than the six-year lows below 69.00 cents touched earlier this month.

Abbott won power in a general election two years ago but his first budget proved highly unpopular and had to fight off a leadership challenge in February after poor polling and a serious of gaffes ignited a backbench revolt.

But he has failed to turn around the polls, bolster the economy or stop damaging internal leaks and lost the support of the majority of his party.

Uncertainty over the Fed's plans for raising interest rates have also kept investors on their toes. While a rate rise is expected by the year's end, the global ructions unleashed by China's devaluation last month has complicated bank policymakers' decision.

However, traders have taken the recent calm to pick up higher-yielding investments.

The greenback also fell against most emerging market currencies. It was 0.13 percent down against the South Korean won, 0.32 percent lower against the Indian rupee and 0.41 percent weaker versus the Singapore dollar. It also softened against the Taiwan dollar and Malaysian ringgit.

The price of gold, another safe bet in times of trouble, was also lower, dipping 0.12 percent to $1,107.75 an ounce.

-- Bloomberg News contributed to this story --