(Updates with closing prices)

By Junko Fujita

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

ended more than 1% higher on Thursday, driven by improving bets

of Liberal Democratic Party (LDP) leader Sanae Takaichi becoming

the next prime minister, spurring hopes of a revival in big

spending.

The Nikkei rose 1.27% to close at 48,277.74, and the

broader Topix gained 0.62% to 3,203.42.

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.

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

manager - investment research 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, leaving the LDP and opposition parties scrambling to

form new alliances.

"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 earlier in

the session as U.S. Treasury Secretary Scott Bessent and

Japanese Finance Minister Katsunobu Kato held talks in

Washington.

The Japanese currency briefly firmed to a one-week high of

150.51 per dollar but was last down 0.14% at 151.25.

Among stocks that boosted the Nikkei, technology investor

SoftBank Group surged 8.59% and chip-making equipment

maker Tokyo Electron ( TOELF ) gained 4%.

Cable maker Fujikura ( FKURF ), a gauge for artificial

intelligence data centre investments, rose 3.96%.

Renesas Electronics ( RNECF ) surged 8.23% 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 5.8% and Keihanshin

Building ( KEIHF ) jumped 7.32%. Keihan Holdings ( KHNRF ) rose

4.14%.

Uniqlo brand owner Fast Retailing ( FRCOF ) slipped 0.53% to

weigh on the Nikkei the most.