TOKYO, Aug 26, 2010 (AFP) - Japanese shares saw a slight rebound Thursday as a weaker yen spurred bargain hunting in morning trade after the heavy selling of recent weeks, but gains were limited by fresh political uncertainty.

The headline Nikkei index firmed to 8,872.52, up 27.13 points or 0.31 percent, by noon, after closing at a new 16-month low on Wednesday.

The Topix index of all first-section shares edged up 0.30 points, or 0.04 percent, to 807.61.

Japanese shares, which have been heavily sold in recent weeks, opened higher as investors followed a Wall Street rebound Wednesday and as the yen weakened slightly against the dollar, analysts said.

Amid speculation Japan may intervene in markets to check the yen's strength, the dollar fetched 84.63 yen in Tokyo morning trade, almost in line with its levels in New York late Wednesday, after falling to a 15-year low Tuesday.

A higher yen hampers Japan's exporters, the main driver of the country's economy, by making their products more expensive overseas and erodes profits repatriated into Japan.

But Thursday's gains in Japanese shares were capped after controversial power broker Ichiro Ozawa said he will run in the ruling party's leadership election next month, aiming to replace Prime Minister Naoto Kan.

Ozawa's move generated fears that it would undermine Kan's two-month-old administration that is struggling to combat Japan's nagging deflation and the surging yen.

"The political risk that Mr Ozawa's participation will further delay government policies (to stem the yen's rise) is weighing on the market," Masayoshi Yano, senior market analyst at Meiwa Securities, told Dow Jones Newswires.

He also said market players were frustrated that they will unlikely see any monetary policies such as currency intervention and further easing while Bank of Japan governor Masaaki Shirakawa visits the United States until Monday.

Toshikazu Horiuchi, strategist at Cosmo Securities, said despite Thursday's gains, the downward stock market trend "will not change until the government takes action, so there will be no active buying beyond a technical rebound."

The government and the Bank of Japan have faced serious criticism for doing little to slow the yen's rise, amid loud calls from businesses to take action. Honda Motor firmed 0.47 percent to 2,731 yen and Nissan Motor was up 0.15 percent to 628 yen. Toyota Motor slipped 0.27 percent to 2,902.

Canon was 0.72 percent higher at 3,450 while machinery maker Fanuc gained 1.98 percent to 9,270.