TOKYO, Oct 16 (Reuters) - Japan's Nikkei share average

rose on Thursday as prospects of Liberal Democratic Party (LDP)

leader Sanae Takaichi becoming the next prime minister

increased, stoking bets on a revival in big spending and loose

monetary policy.

The Nikkei rose 0.87% to 48,088.07 by the midday

break, while the broader Topix was up 0.49% at 3,199.18.

The Japan Innovation Party emerged as a possible coalition

partner for the LDP after its leader said the party would back

Takaichi for the premiership if the two parties agreed on

policy.

"Takaichi trade is back," said Shoichi Arisawa, general

manager of the investment research department at IwaiCosmo

Securities.

The Nikkei surged to a record high last week after Takaichi

was elected as the LDP leader, paving the way for her to become

the country's next prime minister. But that expectation faded

after the LDP's long-term partner Komeito left the coalition

last week.

"The Nikkei could rebound to its high scaled earlier this

month. But the yen has strengthened, which is negative for

domestic stocks," Arisawa said.

The yen strengthened against the dollar as U.S. Treasury

Secretary Scott Bessent and Japanese finance minister Katsunobu

Kato held talks in Washington.

Among stocks that gained in Japan, technology investor

SoftBank Group jumped 6.58% and chip-making equipment

maker Tokyo Electron ( TOELF ) gained 3.65%.

Cable maker Fujikura ( FKURF ), a gauge for AI data centre

investments, rose 1.58%.

Renesas Electronics ( RNECF ) surged 7.28% after Reuters

reported that the chip maker was exploring a sale of its timing

division in a deal that could value the business at close to $2

billion.

Shares of Osaka-based property and railway firms gained,

buoyed by prospects of Osaka becoming the second capital of

Japan - a policy supported by the Japan Innovation Party.

Hankyu Hanshin Holdings ( HYUHF ) rose 4.72% and Keihanshin

Building ( KEIHF ) gained 1.9%. Keihan Holdings ( KHNRF ) rose

3.92%.

Uniqlo brand owner Fast Retailing ( FRCOF ) slipped 0.76% to

weigh on the Nikkei the most.

(Reporting by Junko Fujita; Editing by Subhranshu Sahu)