TOKYO, July 1 (Reuters) - Japan's Nikkei share average traded higher on Monday but erased most of early gains, after the Bank of Japan's Tankan survey drove expectations for the central bank's interest rate hike bets.

The Nikkei was up 0.26% at 39,687.32 by the midday break, after rising as much as 0.9% earlier in the session, tracking its futures higher on Friday.

The Nikkei average futures on the Chicago Mercantile Exchange ended 1% higher on Friday.

The broader Topix rose 0.49% to 2,823.34.

"The outcome of the BOJ's tankan suggested that Japanese companies will keep raising prices and inflation will continue," said Shuutarou Yasuda, a market analyst at Tokai Tokyo Intelligence Laboratory.

"That lifted expectations that the BOJ will raise rates again soon, and promoted inventors to sell stocks to lock in profits."

The BOJ's closely watched "tankan" survey showed on Monday the headline sentiment index for big manufacturers hit +13 in June, up from +11 in March and slightly exceeding a median market forecast for a reading of +12.

The reading, which was the highest since March 2022, reflected a rebound in automobile sector output and success by manufacturers to pass on rising raw material costs through price hikes.

Japan's 10-year government bond yield rose 3 basis points to 1.075%.

Shares of department store operators rose, with J.Front Retailing surging 12.76% to become the top percentage gainer on the Nikkei and Takashimaya jumping 7.9%, after they raised their annual profit forecast.

The shipping sector rose 3.52% and was the top gainer among the Tokyo Stock Exchange's 33 industry sub-indexes.

The insurance sector rose 2.13%.

Medical equipment maker Terumo fell 2.68% to become the biggest drag for the Nikkei.

Microchip equipment maker Lasertec fell 3.63% to become the biggest loser on the Nikkei. (Reporting by Junko Fujita; Editing by Rashmi Aich)