Japan's Nikkei gains on softer yen; investors snap up banks and defence stocks

Updates for market close

By Brigid Riley

TOKYO, Feb 18 (Reuters) - Japan's Nikkei share average finished higher on Tuesday, as investors cherry-picked banks on rate-hike bets and defence stocks after their European peers closed higher overnight, while a softer yen boosted exporters.

The Nikkei .N225 rose 0.3% to 39,270.40 in its second consecutive session of gains. The broader Topix .TOPX also finished 0.3% higher, at 2,775.51.

Japanese stocks traded in recent ranges with U.S. markets closed on Monday for a holiday, although a weaker yen supported buying of automakers and other exporter shares.

Toyota Motor 7203.T ticked up 1.1%, while Mitsubishi Motors 7211.T surged 6.9%.

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 7011.T added 2.7%, Kawasaki Heavy Industries 7012.T climbed 4.7% and IHI Corp 7013.T jumped 6.3%.

Rate-sensitive banks .BNKS.T gained 1.6% as Japanese government bond yields hit fresh highs. Data on Monday showed the economy expanded more than expected in the fourth quarter, supporting the Bank of Japan's plans to continue hiking rates.

Market participants now await remarks from BOJ board member Hajime Takata on Wednesday and the CPI report on Friday.

A hot inflation figure may prompt markets to bring forward their rate-hike expectations, 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 1.6%, Sumitomo Mitsui Financial Group 8316.T was up 0.8%, and Mitsubishi UFJ Financial Group 8306.T rose 2%.

Elsewhere, chip-related shares Advantest 6857.T and Tokyo Electron 8035.T added 3.2% and 1.4%, respectively, to give the Nikkei the biggest lift.

Nissan Motor 7201.T climbed 3.7% after the Financial Times reported rival Honda Motor 7267.T is ready to revive merger talks if Nissan CEO Makoto Uchida steps down. Honda edged down 0.5%.