Japan's Nikkei gains as investors pick up banks and defence shares

By Brigid Riley

TOKYO, Feb 18 (Reuters) - Japan's Nikkei share average rose on Tuesday, as investors cherry-picked banks on interest rate-hike bets and defence stocks after their European peers closed higher overnight.

The Nikkei .N225 had climbed 0.3% to 39,296.11 by the midday break, while the broader Topix .TOPX was up 0.2% at 2,772.78.

U.S. markets were closed on Monday for a holiday and the yen traded mostly unchanged on Tuesday, leaving Japanese stocks to trade in recent ranges as share- and sector-specific drivers drew the biggest moves.

Mitsubishi Heavy Industries 7011.T and other defence-related shares rallied, after their European peers gained on Monday as investors priced in the likelihood of increased military spending in the region.

Mitsubishi Heavy Industries rose 2.8%, Kawasaki Heavy Industries 7012.T climbed 3.4% and IHI Corp 7013.T jumped 4.6%.

Rate-sensitive banks made modest gains again after data showed on Monday the economy expanded more than expected in the fourth quarter, supporting the Bank of Japan's (BOJ) plans to continue hiking rates.

Market attention will be on remarks by BOJ board member Hajime Takata on Wednesday, followed by the CPI report on Friday.

If the inflation report produces a strong number, that may lead to bets that the BOJ will hike again sooner than currently expected, strengthening the yen, said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.

"If the yen appreciates significantly, that could put pressure on Japanese stocks and potentially trigger selling," he said.

Mizuho Financial Group 8411.T gained 0.8%, Sumitomo Mitsui Financial Group 8316.T was up 0.4%, and Mitsubishi UFJ Financial Group 8306.T rose 0.9%.

Nissan Motor 7201.T surged 5.4% after the Financial Times reported rival Honda Motor 7267.T is ready to revive merger talks if Nissan CEO Makoto Uchida steps down. Honda ticked up 0.3%.

Chip-related shares Advantest 6857.T and Tokyo Electron 8035.T added 2.5% and 1.8%, respectively, to give the Nikkei the biggest lift.