* Nikkei nears 32-month high, Topix rises 1.7 pct * Nikkei down 0.7 pct this week, set to end 10-week winning run * More upside expected in coming months - analyst By Ayai Tomisawa TOKYO, Jan 25 Japan's Nikkei share average rose on Friday as a sharp drop in the yen gave a boost to exporters and raised expectations for upbeat earnings forecasts for the next fiscal year beginning in April. The Nikkei was up 2.0 percent at 10,832.48 at the midday break but is down 0.7 percent so far this week, retreating from a 32-month high hit on Jan. 15 and on track to snap a 10-week run of weekly gains that was the longest since 1987. The yen tumbled to 90.695 against the dollar early on Friday, its lowest level since June 2010, and dropped to 121.32 against the euro, its lowest since April 2011, after comments by a senior Japanese government official that the government has no problem with the dollar hitting 100 yen. "Right now, trading cues are basically these two: currency moves and quarterly earnings," said Hiroichi Nishi, assistant general manager of equity research at SMBC Nikko Securities. Analysts said investors are chasing the market higher, as the underlying mood remains bullish on expectations that company earnings will exceed forecasts that were based on conservative foreign exchange assumptions. Exporters led the gains, with Panasonic Corp rising 2.0 percent, Toshiba Corp adding 5.3 percent and Nissan Motor Co gaining 2.7 percent. A J.P. Morgan report said Toshiba's tie-up with General Electric Co in the thermal power generation field, announced on Thursday, would strengthen its growth outlook. Toyota Motor Corp rose 1.9 percent after it and BMW AG said they will jointly research a lithium-air battery expected to be more powerful than the lithium-ion batteries used in many hybrid and electric vehicles, aiming to cut development costs as global competition heats up. Financials rose, with Nomura Holdings Inc gaining 1.2 percent and Mitsubishi UFJ Financial Group adding 1.3 percent as investors sought high-beta stocks. MORE UPSIDE The Nikkei has gained about 25 percent since mid-November on expectations that Japan's new prime minister, Shinzo Abe, will pursue aggressive policies to tackle the country's prolonged deflation, including pressuring the central bank for further monetary easing. The market's gains stalled earlier this week after the Bank of Japan said its open-ended commitment to buy assets would kick in only next year, disappointing investors who had expected far more aggressive easing measures. But analysts said there was further potential for gains in the market, with investors looking for strong earnings forecasts for the fiscal year ending in March 2014 when companies start releasing full-year earnings reports in late April and May. The yen's steep decline has burnished the outlook for Japanese stocks, prompting analysts to raise profit forecasts for currency-sensitive exporters and foreign investors to plough $17 billion into the market, the biggest monthly inflow since 2010. "We can look forward to more good news from both the domestic market and the global market for the coming months," said Nobuhiko Kuramochi, a strategist at Mizuho Securities. He said the Nikkei was likely to reach 11,150 if the yen remains weaker than 90 to the dollar for a sustained period. "Speaking from a currency-stock correlation point of view, our research showed that the Nikkei's level was around 10,041 when the yen traded around 85 yen to the dollar," Kuramochi said. He added that signs of a U.S. economic recovery will also likely serve as a tailwind for the Japanese market. U.S. factory activity grew the most in nearly two years in January and new claims for jobless benefits dropped to a five-year low last week, giving surprisingly strong signals on the economy. The broader Topix added 1.7 percent to 912.44 in active trade, with 1.76 billion shares changing hands, on track to post full-day volume close to last week's daily average volume of 3.73 billion shares.