A rally in Asian shares continued on Thursday as encouraging signs about the health of U.S. banks and the state of the global economy bolstered riskier assets such as oil and hurt safe-havens such as the yen.

Japan's Nikkei average <.N225> surged 4.5 percent after a three-day holiday in the country, as investors sought to catch up with gains of 8 percent so far this week by the MSCI regional index outside Japan that has brought the gauge to its highest since early October.

Nearly eight months after Lehman Brothers collapsed, leaked stress test results for U.S. banks suggested they were healthier than previously thought, even if some institutions such as Bank of America are expected to have to raise more money than estimated.

That came as a big relief for global investors ahead of the release of formal results later in the day. The improving confidence is being reinforced by continued hopeful signs on the world economy.

A report on Wednesday showed U.S. private sector job losses slowed much more than expected in April, while data showed business activity in Europe staged its biggest one-month increase since December 2001.

Helping underpin the improved mood are steep cuts in borrowing costs by central banks that have brought interest rates to nearly zero in the United States and Japan, as well as a host of unconventional policies adopted by some governments.

The European Central Bank is widely expected to cut interest rates by a quarter percentage point to 1 percent later on Thursday, though the focus is mainly on whether it will follow other countries in adopting these alternative measures.

The market now holds the view that the worst may be over, at least for America. A very strong bull market appears to have begun, said Fumiyuki Nakanishi, manager at SMBC Friend Securities in Japan.

The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> gained 1.6 percent as of 0300 GMT on Thursday (11 p.m. on Wednesday), and has now risen every day this week.

The gauge has now risen an astounding 50 percent since its post-Lehman crisis low in mid-September as investors are increasingly focusing on the positive signs and disregarding other signs that show that any recovery in the global economy or the financial system is unlikely to be swift.

South Korea, for example, on Thursday warned against expecting the economic recovery trend to continue, saying the upturn was still weak and citing an uncertain global economy, but the KOSPI <.KS11> index still advanced 0.7 percent.

On the positive side, data on Thursday showed Australian employment jumped against all expectations in April, pulling down the jobless rate and suggesting the economy may not be faring as badly as many believed.

That sent Australian shares <.AXJO> up 1.9 percent and the country's currency to seven-month highs against the U.S. dollar on Thursday. Other stock indexes in the region, including in Hong Kong <.HSI> and Singapore <.FTSTI> advanced more than 1 percent each.

FAILURE NOT AN OPTION

More broadly, investors have been widely comforted by official reassurances U.S. banks are holding up better than expected following a test of 19 large banks, and by its pledge that no big U.S. bank will be allowed to fail.

None of those 19 banks are at risk for insolvency, U.S. Treasury Secretary Tim Geithner said, according to a transcript of a TV interview with the Charlie Rose Show.

That comfort is allowing investors to shift toward riskier assets. U.S. crude futures steadied at $56.61 a barrel on Thursday, after rising more than $2 in the previous session on data showing a surprise drop in U.S. gasoline inventories.

Expectations for a stronger global economy and a series of output cuts by the Organization of Petroleum Exporting Countries have also played a role in bringing crude prices up since their lows of $33 this winter.

On the other hand, the improved risk appetite is hurting some assets seen as havens such as the Japanese yen, which retreated on Thursday.

The U.S. dollar rose 0.4 percent to 98.74 yen from late U.S. trade on Wednesday.

Among other key currencies, the euro was down 0.4 percent to $1.3280, after touching its highest in a month at $1.3439 on trading platform EBS on Tuesday, ahead of the ECB meeting later in the day.

(Additional reporting by Aiko Hayashi in Tokyo; Editing by Jan Dahinten)

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