* 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 posted modest gains on Monday, buoyed by an upbeat business sentiment survey and a stable dollar-yen exchange rate, but defeat for Japan's ruling party in a Tokyo poll checked investor risk appetite and capped the upside.
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 tacked on 0.1 percent to 20,055.80.
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 gained 0.2 percent to 112.58 yen.
Toyota Motor Corp rose 1.0 percent, Subaru Corp climbed 1.7 percent and Panasonic Corp gained 0.7 percent.
Outperforming the market was industrial waste disposal business operator Daiseki Co, which jumped 6.9 percent after its operating profit surged 25.2 percent to 2.3 billion for the March-May quarter.
The broader Topix gained 0.2 percent to 1,614.41 and the JPX-Nikkei Index 400 advanced 0.2 percent to 14,376.53. (Editing by Shri Navaratnam)