Nikkei sluggish as expectations for BOJ action priced in

* Nikkei falls in line with firming yen

* Sharp drops, source says iPad panel production slashed

TOKYO, Jan 21 (Reuters) - The Nikkei share average slipped on Monday morning as the Bank of Japan began a two-day policy meeting, stepping back somewhat after last week's 32-month high on expectations the central bank will take aggressive anti-deflation measures. A bounce in the yen gave impetus to profit-taking in stocks and weighed on several exporters. "It seems clear that the exchange rate is continuing to drive the market today," said Hiroyuki Fukunaga, chief executive of Investrust. "But the Nikkei Mothers (index) is strong, which shows that investors are buying stocks that are relatively immune to the movements of the yen," he said. The Tokyo Mothers index which stands for "market of the high-growth and emerging stocks", rose 4.4 percent to 505.58, surpassing the 500-level for the first time since the March 2011 earthquake and tsunami. But heavyweights reversed from their sharp gains on Friday, when the benchmark surged 2.9 percent, its biggest one-day gain in nearly two years, as investors adjusted positions to price in news that the central bank was preparing to approve major easing steps and a new 2 percent inflation target. Fast Retailing Co Ltd, the operator of Uniqlo stores, lost 2.4 percent after gaining 3 percent in the previous session, while the insurance sector dropped 1.3 percent after jumping 5.5 percent on Friday. The Nikkei fell 0.9 percent to 10.820.59 by the midday break, moving further away from a 32-month high of 10,952.31 hit last Tuesday. "I think everyone is in agreement that the direction the (government and the central bank) are going in is good, but we don't know whether they will actually be able to achieve their aims," said Yuuki Sakurai, CEO and president of Fukoku Capital Management. Some investors are concerned that the Nikkei's recent rally - around 26 percent in two months since then-incoming Prime Minister Shinzo Abe began to call for aggressive easing - has been too steep, leaving the market ripe for a correction. "Results are a long way off. We're in a grace period thanks to little bad news out of Europe and a temporary respite from the fiscal cliff, but when things flare up again the yen is likely to bought as a safe haven and will strengthen," Sakurai added.

EXPORTERS, YEN Exporters such as automakers have seen their share prices shoot up over the past two months, driving the Nikkei's rally, as a weaker yen promises higher overseas revenue when repatriated, making them more competitive against foreign firms. Toyota Motor Corp's share price, for example, has risen 37 percent in that two months. Eiji Kinouchi, chief technical analyst at Daiwa Securities, recommends buying automaker shares on the dip if the market falls after the BOJ meeting, as well as those of banks and real estate. Some investors are concerned that a weaker yen could cause friction with U.S. manufacturers, as well as hurting Japanese importers and even manufacturers if it causes energy prices to rocket. The electric and gas sector dropped 1 percent on Monday morning and was the second worst-performing subindex following an International Energy Agency report warning about high Chinese demand and lower OPEC supplies, in addition to an Algerian hostage crisis that may also hamper production. The broader Topix index edged down 0.3 percent to 908.66. Sharp Corp lost 3.2 percent after two sources told Reuters that the company has nearly halted production of 9.7-inch screens for Apple Inc's iPad, possibly as demand shifts to its smaller iPad mini. But Seiko Epson Corp advanced 5.6 percent after JP Morgan upgraded the printer maker to "overweight" from "neutral" and hiked its target price to 1,600 yen from 700 yen, saying its global market share had increased. "We forecast a strong euro and a better product mix to drive the first top-line growth in eight years in FY2013, and think forward profits will also be favourably positioned to exceed our estimates," JP Morgan analyst Hisashi Moriyama wrote in a note.