Yen extends fall, Asian shares edge higher on U.S. fiscal hopes TOKYO (Reuters) - The yen hit its lowest level in more than two years on Friday, helping lift Japanese stocks to 21-month highs on expectations of drastic monetary easing, while shares in the rest of Asia inched higher on signs Washington is racing to avoid a fiscal crisis. U.S. President Barack Obama and lawmakers are launching a last round of budget talks before a New Year's deadline to reach a deal or watch the economy go off a "fiscal cliff," that economists fear will push the United States back into recession and stamp out fragile signs of recovery elsewhere. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.4 percent. It has gained about 18.5 percent this year, a sharp turnaround from an 18 percent plunge in 2011. Australian shares .AXJO rose 0.6 percent to a 19-month high and were on track to post their strongest annual gain since 2009, with resources supported by rising iron ore prices. Hong Kong shares .HSI hovered near a 17-month high with a 0.2 percent gain and Shanghai shares .SSEC rose 0.4 percent. European shares were nearly flat overnight, and U.S. stocks marked a fourth straight session of losses. Oil prices rose on hopes the United States would resolve the fiscal crunch of automatic tax hikes and spending cuts, easing concerns about weakening demand. Brent crude had inched up 20 cents to $111 per barrel and on course to post a full-year increase of about 3.4 percent, which would be its smallest gain in four years. U.S. crude rose 0.5 percent to $91.28, set for its first yearly loss in four years. <O/R> "The U.S. fiscal cliff will continue to direct crude prices until they're resolved," said Natalie Rampono, a commodities analyst at ANZ in Melbourne. As well as being deadline day for the fiscal cliff, December 31 is the date the federal government is set to reach its $16.4 trillion debt limit. The Treasury will have to take measures to buy time for the government to approve a rise in the debt ceiling. A similar political stalemate over raising the federal debt limit in the summer of 2011 raised fears over a U.S. default, and prompted Standard & Poor's to strip the U.S. of its top-notch credit rating, causing a turmoil in financial markets. Asian bond issuance jumped to $133.8 billion so far this year, eclipsing the previous year's tally of $76.34 billion, as retail investors stepped up purchases of the region's corporate bond. Those bonds have returned nearly 20 percent this year, outshining Asian equities. Under the leadership of Prime Minister Shinzo Abe who took office earlier in the week, Japan is speeding up efforts to turn around its economy, battered for decades by its strong currency and deep-rooted deflation. A survey on Friday showed Japanese manufacturing activity contracted in December at its fastest pace in more than three years. Other data were also grim, with core consumer prices falling in November and industrial output plunging 1.7 percent in November from October. Abe's repeated calls for "unlimited" monetary easing and policies aimed at reducing the yen's strength have bolstered expectations of a sustained period of yen weakness. This has lifted the mood in Japanese stocks as a weaker yen improves earnings prospects for the country's exporters. The benchmark Nikkei average .N225 rose 0.8 percent to a 21-month high and on track for its best yearly gain since 2005. .T The dollar climbed to its highest since August 2010 of 86.64 yen on Friday. The yen is on track for a drop of 12 percent this year, its steepest since 2005. The yen also fell to a 17-month low against the euro at 114.66 yen on EBS on Thursday. The Australian dollar hit a 20-month peak against the yen of around 89.83 yen, according to Reuters data. The Japanese government will compile spending requests for a stimulus package on January 7 and finalize the proposal shortly thereafter as Abe tries to quickly enact his agenda of increased public works spending to boost the economy. Additional reporting by Umesh Desai in Hong Kong and Jessica Jaganathan in Singapore; Editing by Sanjeev Miglani