* Nikkei edges up after worst week in 3 mths
* Caution dominates ahead of Fed meeting
* Sapporo soars, Nissan climbs
* Pioneer slides
By Elaine Lies
TOKYO, June 22 (Reuters) - Japan's Nikkei average rose 0.4 percent on Monday, with brewer Sapporo Holdings and car maker Nissan Motor Co making robust gains although caution about a correction in the overall market remained strong.
Fuji Electric Holdings Co and Furukawa Electric Co surged on a report by the Nikkei business daily that they will team up and develop a power chip for hybrid vehicles that will control battery use and increase driving distance.
The Nikkei average has taken a breather since hitting an eight-month intraday high of 10,170.82 earlier this month. It fell 3.5 percent last week, its worst weekly performance in three months.
One near-term key for Japanese equities is the Federal Reserve's two-day policy meeting ending on Wednesday, investors and market analysts said.
"Depending on their comments, (U.S.) long-term interest rates may rise and the dollar could weaken," said Mitsushige Akino, chief fund manager for Ichiyoshi Investment Management, referring to the Federal Reserve.
Investors are worried that higher U.S. long-term yields could hamper the U.S. economy, while a fall in the dollar against the yen could hurt Japanese exporters.
Markets will be watching the Federal Reserve's Open Market Committee for what it says about the economic outlook and a rise in Treasury debt yields, and whether the Fed will make any move to expand or extend its debt buyback programme.
The Nikkei rose 40.01 points to 9,826.27.
The broader Topix edged up 0.4 percent to 922.48.
"There's no real reason to sell, but there are also very few reasons to buy," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
"The Nikkei, as with other stock markets, is waiting for signs about whether the recent rally has ended or whether it will continue."
Market players have said the market may be due for a breather given the Nikkei's steep gains during its three-month rally, which lifted it some 45 percent from a March 10 low to an eight-month high on June 12. This may last until mid-July, when companies start to report earnings, they say.
"I think nobody doubts that the market has bottomed out, but for us to see real recovery we need signs of hope in macroeconomic indicators," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
SAPPORO SOARS
Fuji Electric Holdings jumped 12 percent to 168 yen and Furukawa Electric climbed 7.4 percent to 378 yen. They were among the top percentage gainers in the Nikkei 225 stocks.
Sapporo Holdings soared 18.4 percent to 514 yen after Credit Suisse raised its rating on the brewer to "outperform" from "underperform", saying the market is likely to come to regard the company more as a real estate stock given its heavy dependence on its property business.
Nissan Motor Co rose 5.6 percent to 599 yen after the Nikkei business daily said it plans to invest up to 100 billion yen ($1 billion) to produce electric cars at a plant in the U.S. state of Tennessee, and will build a facility for lithium-ion batteries there with battery partner NEC Corp.
A spokeswoman said Nissan had already announced plans to build electric cars in Japan, North America and Europe, but investment amounts and other details had not been decided.
Among shares that fell were struggling electronics maker Pioneer Corp, which lost 3.0 percent to 288 yen after saying on Friday it would delay issuing new shares to Honda Motor, through which it had been expected to raise 2.5 billion yen, because it was in talks with other potential financial partners.
Trade fell off, with 2.1 billion shares changing hands on the Tokyo exchange's first section compared to last week's daily average of 2.5 billion. Advancing shares outnumbered declining ones by nearly 3 to 1. (Additional reporting by Masayuki Kitano; Editing by Michael Watson)