Japan's Nikkei soars to 6-month high

HONG KONG (Reuters) -- Asian shares extended their rally on Thursday as encouraging signs about the health of U.S. banks and the global economy bolstered riskier assets such as oil and hurt safe-havens such as the yen.

European shares were set to gain for a seventh consecutive session, with investors awaiting interest rate and policy decisions from the European Central Bank and Bank of England later in the day.

"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.

In Japan, the Nikkei average surged 4.6% to its highest close in six months as traders returned after a three-day holiday.

During that period, global stocks continued their rally, with the MSCI regional index outside Japan now at its highest since early October. The index has gained nearly 8% so far this week.

Nearly eight months after Lehman Brothers collapsed, leaked stress test results for U.S. banks suggested they were healthier than expected, even if some institutions such as Bank of America (BAC, Fortune 500) may have to raise a lot more money to shore up their balance sheet in the face of credit losses.

That came as a big relief for global investors ahead of the release of formal results later in the day, helping spark gains in Asian lenders such as Japan's Mizuho Financial Group

Investor confidence is also being reinforced by further signs that the global economic slowdown may be close to turning the corner.

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, the UK and Japan, as well as a host of unconventional policies adopted by some governments and policymakers.

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

The MSCI index of Asia-Pacific stocks outside Japan rose 1.1% as of 0600 GMT, though it pared earlier stronger gains in the morning session.

The gauge has now advanced an astounding 50% since its post-Lehman crisis low hit in early March, as investors focus on the positive signs and disregard other signs showing a recovery in the global economy and the financial system will not be swift.

South Korea 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 index still advanced 0.6%.

On the positive side, data on Thursday showed Australian employment jumped in April, in a major surprise that could calm fears of recession.

That sent Australian shares up 1.8% and the country's currency to seven-month highs against the U.S. dollar. Other stock indexes in the region, including in Hong Kong and Singapore also advanced.

"Though we have been seeing good signs about the world economy, it's still too soon to say it's improving. Basically, we're at a stage where economic worsening has stopped," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.

Among individual movers, Hitachi Ltd surged 7.3% after it more than tripled its operating profit estimate for its last financial year, while Korea Exchange Bank soared 11.2% after a state-owned Korea Development Bank expressed interest in acquiring the small lender.

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.

That comfort is allowing investors to shift towards riskier assets. U.S. crude futures rose 48 cents to $56.82 a barrel, after already rising more than $2 on Wednesday 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.

The improved risk appetite is hurting some assets seen as havens in times of turmoil, such as the Japanese yen, which retreated on Thursday.

The U.S. dollar rose 0.3 percent to ¥98.65 from late U.S. trade on Wednesday.

Among other key currencies, the euro was down 0.2% to $1.3310 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.

Regional bonds also fell, victims of the stock market rally. June 10-year Japanese government bond futures fell 0.16 point to 137.31 from its close last Friday.