By Scott Murdoch

MELBOURNE (Reuters) - Asia's share markets were mostly higher on Tuesday even as global investor attention remains fixed on the prospect of U.S interest rate hikes in the next few months, after two years of unprecedented pandemic-induced policy easing.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.4%, after the U.S market was closed overnight for the Martin Luther King Jr. holiday. The index is up 1.1% so far this month.

Australian shares were up 0.29%, while in China the blue chip CSI300 Index rose 0.33% in early trading.

Hong Kong's Hang Seng Index was up by 0.61%.

Japan's Nikkei stock index was trading 0.63% higher ahead of the Bank of Japan's decision due between 0230-0500 GMT.

The Japanese central bank is not expected to change its ultra low rates stance but its inflation forecasts are likely to be increased for 2022.

Ahead of the meeting's outcome, the dollar was trading against the yen at 114.51. It is still some distance from its low this year of 113.49 last week.

The U.S. Federal Reserve is due to meet Jan. 25-26 and while it is not expected to shift rates then, a growing number of investors think March will be the start of a tightening cycle.

Rate rises are generally seen as negative for riskier assets such as equities.

"Investors' focus remains on the Fed and the pace at which they raise rates," John Milroy, adviser at brokerage Ord Minnett in Sydney, told Reuters.

"We think it will be faster than markets currently expect. Boom conditions remain in the U.S. with a tight labour market. Good for world growth but adds to the inflationary pressures."

The prospect of higher U.S. rates was also playing out in fixed income markets on Tuesday, following the U.S. market closure on Monday.

In Asian cash market trading on Tuesday, two-year yields rose above 1% for the first time since February 2020.

Two-year yields track short-term rate expectations and were last up 3.7 basis points (bps) at 1.0054%.

Five-year yields rose 3.6 bps to 1.5960%, the highest since January 2020. Benchmark 10-year yields were up about 2 bps to 1.8108% in early Tokyo trade.

The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was up at 95.254.

U.S. crude ticked up 0.49% to $84.23 a barrel. Brent crude rose to $86.53 per barrel.

Gold was slightly lower. Spot gold traded at $1,818.2274 per ounce. [GOL/]