(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 rose 0.3% to 39,270.40 in its second

consecutive session of gains. The broader Topix 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 ( TM ) ticked up 1.1%, while Mitsubishi

Motors ( MMTOF ) 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 ( MHVYF ) added 2.7%, Kawasaki

Heavy Industries ( KWHIF ) climbed 4.7% and IHI Corp ( IHICF )

jumped 6.3%.

Rate-sensitive banks 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 ( MFG ) gained 1.6%, Sumitomo Mitsui

Financial Group ( SMFG ) was up 0.8%, and Mitsubishi UFJ

Financial Group ( MUFG ) rose 2%.

Elsewhere, chip-related shares Advantest ( ADTTF ) and Tokyo

Electron ( TOELF ) added 3.2% and 1.4%, respectively, to give the

Nikkei the biggest lift.

Nissan Motor ( NSANF ) climbed 3.7% after the Financial Times

reported rival Honda Motor ( HMC ) is ready to revive merger

talks if Nissan ( NSANF ) CEO Makoto Uchida steps down. Honda ( HMC ) edged down

0.5%.

(Reporting by Brigid Riley; Editing by Subhranshu Sahu)