* Tokyo poll defeat for LDP negative for risk appetite - analysts
* Daiseki soars on solid quarterly earnings
By Ayai Tomisawa
TOKYO, July 3 (Reuters) - Tokyo shares edged up on Monday, buoyed by an upbeat business sentiment survey and a stable dollar-yen exchange rate, but Japan's ruling party's defeat in a Tokyo poll capped the upside and soured investor risk appetite.
In a closely-watched Bank of Japan survey released on Monday morning, confidence among big manufacturers hit its highest in more than three years in the June quarter, adding to signs the recovery in the world's third-largest economy is gaining pace.
But the result of the Tokyo Metropolitan assembly election on Sunday, in which Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) suffered an historic defeat, sapped the market's overall mood. The outcome signals trouble ahead for the premier, who has suffered from slumping support because of a favouritism scandal.
The Nikkei share average saw choppy trade, up 0.2 percent by mid-morning after dipping into negative territory briefly.
Market observers said the ruling party's defeat would have a negative impact on foreign investors' appetite for Japanese stocks in the short term.
"Abe's support rate has been falling, and this result made the mood worse," said Yutaka Miura, a senior technical analyst at Mizuho Securities. "That said, although the ruling party was defeated in the Tokyo poll, it's not like Abe's administration will end soon, so foreign investors are not expected to change their portfolios based on this result for now."
Exporters were mostly solid on Monday, as the dollar was little changed at 112.290 yen after briefly falling to 111.900 earlier before climbing back quickly.
Toyota Motor Corp, Subaru Corp and Panasonic Corp all gained 1.4 percent.
Outperforming the market was industrial waste disposal business operator Daiseki Co, which jumped as much as 9.7 percent to hit its highest since October 2008 after its operating profit surged 25.2 percent to 2.3 billion for the March-May quarter.
Financial stocks lost ground, with insurance and securities sectors falling 0.5 percent and 0.4 percent, respectively. Dai-ichi Life Holdings dropped 1.1 percent and Nomura Holdings declined 0.7 percent.
The broader Topix gained 0.1 percent to 1,613.79 and the JPX-Nikkei Index 400 advanced 0.1 percent to 14,367.49. (Editing by Jacqueline Wong)