(Updates with closing levels)

By Brigid Riley

TOKYO, Aug 14 (Reuters) - Japan's Nikkei share average

rose on Wednesday as investors weighed news that Japan's prime

minister will step down later this year, while they positioned

themselves ahead of U.S. inflation data.

The Nikkei finished up 0.6% at 36,442.43 to secure

its third consecutive day of gains, while the broader Topix

closed 1.1% higher at 2,581.90.

The Nikkei initially rallied more than 1% after local

media reported Japanese Prime Minister Fumio Kishida will step

down as ruling party leader in September, which he later

confirmed in a televised press conference.

Analysts said although the prime minister's decision to step

down could add some uncertainty, the impact should be limited.

"His low approval ratings mean a significant negative

reaction from equities may be avoided," said Charu Chanana,

global market strategist and head of FX strategy at Saxo.

The stock market had also tracked overnight gains in Wall

Street after U.S. producer prices data buoyed bets for the

Federal Reserve to cut interest rates in September.

However, the gains narrowed as investors locked in profits

and attention turned to the closely-watched U.S. consumer prices

data due later on Wednesday.

While the inflation report could bolster confidence of a

U.S. rate cut, retail sales and labour-related data scheduled

for later in the week remain key, Chanana said.

"Markets still remain on edge about a potential U.S.

recession and any signs of consumer strain could buoy the yen

and bring another pullback in Japanese equities."

Automakers came out as the top performing

sector, up 2.8%, led by over 3% gains in Toyota Motor ( TM )

and Honda Motor ( HMC ).

Among individual shares, startup investor SoftBank Group

rose 1.7% to give the Nikkei the biggest lift, followed

by staffing agency Recruit Holdings ( RCRRF ), up 2.5%.

Chip-testing equipment maker Advantest ( ADTTF ) gained

1%, although fellow chip-related share Tokyo Electron ( TOELF )

slid 0.6%.

(Reporting by Brigid Riley; Editing by Subhranshu Sahu, Mrigank

Dhaniwala and Varun H K)