Japanese shares rose to 18-month highs on Wednesday, continuing to eclipse their peers elsewhere in Asia, as a rebound in U.S. consumer confidence boosted investors' hopes that the global economic recovery will prove to be sustainable.

European shares were expected to open higher, adding to quarterly gains for the FTSEurofirst 300, which has risen 3.3 percent despite worries about debt-laden Greece.

Richer markets led global gains this year, with the S&P 500 up more than five percent and the Nikkei up 5.2 percent. In contrast, emerging markets have stumbled on worries that their surge in 2009 had left shares overvalued -- a trend expected to reverse later this year.

Improvement in the global economy and world stock markets -- the Dow is nearly back at the level it was when Lehman collapsed -- will mean still further improvement in the Nikkei over the April to June quarter, said Fumiyuki Nakanishi, group manager at SMBC Friend Securities in Tokyo.

All of the world's big stock indexes are expected to finish the year higher than now, Reuters polls showed in mid-March.

The S&P 500 could gain 10 percent over all of 2010, outperforming European rivals dogged by worries about high debt levels in Greece and other parts of the euro zone.

Japanese stocks as measured by the MSCI index have climbed 7.8 percent in the January-March quarter despite the country's underlying economic weakness, outperforming a roughly 2 percent gain in the rest of the Asia-Pacific, much of which is fundamentally strong economically.

That puts the performance of Tokyo shares on a par with those in Indonesia, which have been the top performer in MSCI's Asia-Pacific ex-Japan index so far this year.

Indonesia's local stock index has already climbed more than 10 percent this quarter, nearing a record set in January 2008. Global stocks are up 2.7 percent.

FOREIGN BUYING

Healthy buying by foreign investors has supported both Indonesian and Japanese stocks recently and further gains are expected in coming months, with Jakarta seen buoyed by a strong economy and improving corporate earnings boosting Tokyo.

Steady buying by foreigners, who were underweight Japanese equities last year, has contributed to this quarter's rally. They have bought a net 1.9 trillion yen ($20.5 billion) worth of Japanese shares so far in 2010. That compares with net buying of just 28.7 billion yen for all of 2009.

Returns for local bonds have also been strong this quarter. According to Datastream for GBI-EM, returns for Indonesian bonds in dollar terms have been 12.04 percent, Thailand 5.6 percent, and the overall index 7.4 percent.

But traders say this kind of return may become difficult to achieve because many central banks are likely to start hiking rates.

The Australian dollar fell after retail sales there surprised by falling a steep 1.4 percent in February, more than unwinding January's jump and casting doubt on market expectations for an increase in interest rates next week.

The yen fell and hit a three-month low against the dollar as short-term players unwound yen long positions before the Easter holidays.

The dollar rose 0.5 percent to 93.23 yen, having trimmed some gains after rising to 93.60 yen on trading platform EBS, its highest since early January.

The euro held steady at $1.3408.

Oil prices were little changed at $82.28 per barrel, while gold ticked higher to $1,106.80 an ounce.

($1=92.75 Yen)

(Additional reporting by Elaine Lies in Tokyo, Viparat Jantraprap in Bangkok and Saikat Chatterjee; Editing by Jan Dahinten)

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