Japanese stocks led Asian equities higher, climbing to their highest since May, and oil prices were perched near a 27-month high on Tuesday, with investors betting the improving U.S. recovery may be reflected in jobs data later in the week.

The dollar also rose while U.S. Treasuries dipped in Asia as investors kicked off the year turning to riskier assets such as high-yield credit, on signs that growth in the world's biggest economy may accelerate in 2011.

The big test for the U.S. economy comes later this week when the government will publish its December jobs report after a report that manufacturing activity increased in December at its fastest clip in seven months. U.S. stocks hit two-year highs overnight, though the March S&P 500 future was steady. <.N>

Japan's Nikkei <.N225> stock average closed 1.65 percent higher at its highest level in 7- months, led by resource companies, as oil and commodity prices rose on the stronger economic growth outlook this year.

Market players are now focusing on the U.S. payrolls data due on Friday, which will likely have an impact on both Wall Street shares and the dollar/yen rate, said Kazuhiro Takahashi, general manager at Daiwa Capital Markets in Tokyo.

Stocks are also getting a boost from the January effect when fund managers are no longer distracted by year-end window dressing and instead focus on stocks they find attractive, traders said.

The MSCI index of Asia Pacific shares excluding Japan <.MIAPJ0000PUS> was largely unchanged on the day, just shy of a 2-1/2-year high hit in November.

The Shanghai Composite Index <.SSEC> was up 1.4 percent, supported by a 5 percent jump in property stocks as worries about further monetary tightening eased after surveys indicated that Chinese factory inflation may be abating.

Accelerating inflation and record house prices have led China's central bank to signal time and again in recent months that the country needs prudent monetary policy to curb price pressures and prevent asset bubbles.

But a fall in the official purchasing managers' index in December over the previous month held out hope that inflation, running at its highest in over two years, may be peaking soon.

2011 may witness the start of a new round of the growth cycle, driven by regional economic development and industry restructuring, said Huatai-PineBridge Fund Management Co fund manager Qin Lingsong.

Chinese corporate profits are expected to rise 15-20 percent annually, which lends strong support to current valuations.

Still, investor Jim Rogers said inflation remained a top concern for Chinese policymakers.

But I think they'll be more tightening in China because the Chinese do have a serious inflation problem..... And they're determined to kill it, he told Reuters Insider TV [ID:nRTV177015]

While the mood was upbeat across much of Asia, shares in Australia underperformed the region, and both the Australian and New Zealand dollars were under pressure because of worries over the impact of floods in northeast Australia.

Heavy flooding in Queensland has cut coal exports and hurt wheat production. Miners such as Rio Tinto have declared force majeure and cut coal exports to a trickle.

The lights were flashing a very verdant green at the start of the session but now it has fizzled. I suspect it will come back a bit later, said Michael Heffernan, strategist at Austock Group.

The floods are likely to have some impact on coal stocks. The S&P/ASX 200 index <.AXJO> was 0.06 percent lower while the Australian dollar fell to 0.9 percent to US$1.0068.

DOLLAR GAINS, TREASURIES DECLINE

The U.S. dollar was stronger, rising 0.6 percent to 82.20 yen, having bounced from an eight-week low of 80.93 yen hit on trading platform EBS on Monday. Analysts expect more traction for the greenback in the months ahead as the recovery gathers strength.

The euro eased slightly after last week's short-covering surge, with some traders citing talk of euro-selling by investors related to euro zone bond redemptions. There is lots of talk about German bond redemptions today, said a trader for a European bank in Singapore.

The benchmark 10-year Treasury notes were down 5/32 in price to yield 3.35 percent, ahead of a raft of U.S. data including November factory orders and December vehicle sales figures later on Tuesday.

Sensing hunger among international investors for higher yield, the Philippines has embarked on a $1.5 billion, 25-year global peso bond sale. The maturity is longer than the initial plan to sell bonds of 10 to 20 years maturity and the amount being raised has been increased, indications that demand for the paper is high.

The favorable economic fundamentals will attract foreign interest. External liquidity indicators are good and should provide strength to the peso. From those perspectives there should be adequate interest for the global peso bond, said Joey Cuyegkeng, analyst with ING.

Oil was steady at $91.60, near its highest levels in more than two years as accelerating manufacturing activity in the U.S. and frigid winter weather fanned optimism that U.S. crude inventories will continue to drain.

Copper futures opened at a record high in London on Tuesday after the New Year break, chasing a rally in New York which touched an all-time high in the previous session.

(Additional reporting by Ayai Tomisawa and Antoni Slodkowski in Tokyo, Ian Chua in Sydney, Umesh Desai and Vikram S.Subhedar in Hong Kong and Samuel Shen in Shanghai, Editing by Kevin Plumberg)

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