* Nikkei edges higher, led by futures
* Encouraging U.S. data underlines recovery expectations
* Japan election inhibits activity from domestic investors
TOKYO, Aug 26 (Reuters) - Japan's Nikkei stock average rose 0.8 percent on Wednesday as exporters gained in the wake of encouraging U.S. data that boosted investor confidence about the strength of the U.S. economic recovery. Toyota Motor Corp climbed after the Nikkei business daily reported it would cut its annual global production capacity by 10 percent, or 1 million vehicles, and return to an operating profit in the 2010 financial year.
Market analysts say many expect Japan's opposition Democratic Party to win the election on Sunday but investors remain hesitant about actively taking positions before they see the results, particularly domestic investors.
"The (U.S.) data is encouraging because it points to continued economic improvement, but the Nikkei won't rise that much because investors are a bit wary about chances of an adjustment. After all, it has risen around 50 percent since March," said Kenichi Hirano, operating officer at Tachibana Securities.
"The election will also make it hard to buy, but I think the market basically expects a victory by the Democratic party and has factored that in."
Other market players said that buying in futures was lifting the cash market as well in the absence of other strong trading factors. The low turnover seen on the past two days was also likely to continue, making substantial rises difficult.
The benchmark Nikkei rose 0.8 percent or 86.98 points to 10,584.34, while the broader Topix rose 0.7 percent to 971.94.
U.S. shares edged higher after the Conference Board's August index of consumer confidence topped economists' forecasts, while the S&P/Case-Shiller home price index rose for a second consecutive month in June, suggesting a recovery in two sectors crucial for U.S. recovery.
U.S. investors also welcomed the renomination of Ben Bernanke as Federal Reserve Chairman.
Exporters, which had weighed on the Tokyo market on Tuesday, rose on short-covering, with Honda Motor Co up 1 percent to 3,010 yen, Kyocera Corp up 1.1 percent to 7,680 yen and Panasonic Corp edging up 0.7 percent to 1,493 yen.
Toyota rose 1.7 percent to 4,120 yen after the Nikkei report, which said the company will slash its production capacity to 9 million cars a year, to raise the operating ratio at its plants above the break-even point of 70 percent and return to an operating profit in fiscal 2010.
NEC Electronics Corp and unlisted Renesas Technology Corp pushed back the deadline for their merger agreement to September, as their parent firms and government officials discuss how much support each would give.
NEC Electronics rose 11.4 percent to 980 yen. (Reporting by Elaine Lies; Editing by Hugh Lawson)