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* Investors cautious ahead of BOJ announcement * Sony in focus on new tablet news * Toshiba rises after broker upgrade * Olympus up, takes step to remove TSE warning By Tomo Uetake TOKYO, Jan 22 (Reuters) - The Nikkei share average eased on Tuesday as investors awaited the outcome of a Bank of Japan policy meeting which is expected to set a 2 percent inflation target, double the current figure, and introduce more aggressive easing steps to boost growth. The BOJ is also widely expected to bump up its budget for asset purchases and discuss scrapping the interest it pays on banks' reserves, according to sources familiar with the central bank's thinking. The Nikkei fell 0.4 percent to 10,704.09 by the midday break, retreating for a second day in a row from Friday's nearly three-year closing high, with investors unwilling to play their hands before the BOJ announcement. "It's quite difficult for the market to move in one direction before the BOJ announcement. The market is closely monitoring what they are going to say after today's meeting," said Shun Maruyama, chief Japan equity strategist at BNP Paribas Securities. "If BOJ governor Shirakawa hints that the central bank has secured its independence, I think the yen could strengthen. On the other hand, if he changed his attitude, the yen could soften. Anyway, the stock market is going to be very sensitive to moves in the forex market," Maruyama added. Investors have been girding for the BOJ decision since mid-November when Shinzo Abe, then the leading candidate to win a general election and now prime minister, began calling for aggressive easing, helping to weaken the yen. That boosted exporters and sparked a 26 percent rally in the Nikkei. Some think the market has become overbought as a result, with the BOJ meeting a ripe opportunity for a correction. The Nikkei's up-down ratio, or the 25-day moving average of gainers divided by the 25-day average of losers, stood at 146.85, well above the 120-mark that signals an overheated market. "I think the yen's weakening is pretty much over, which means the Nikkei's run is also over," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities. The yen was still off its 2-1/2 year low against the dollar hit on Monday morning, trading at 89.43 yen. However, Nakanishi said the market would remain firm, albeit with a different focus. "Exporters are overbought and attention is now going to switch to domestic companies as the supplementary budget is discussed in the Diet, which opens again on Jan. 28," he added. On Tuesday morning, Sony Corp remained in focus, gaining as much as 3.3 percent on the back of a report in the Nikkei business daily that it would launch a new version of its Xperia tablet in Japan this spring after halting sales last year due to problems. Sony topped the main board as the most-traded stock by turnover for a third day, after news on Friday that its U.S. subsidiary would sell its New York headquarters building, with $685 million of the sale to be recorded as operating income. Toshiba Corp rose as much as 3.3 percent to 379 yen, its highest in nearly 10 months, after J.P. Morgan raised its rating to "overweight" from "underweight", citing expectations of strong earnings on a softer yen. "The depreciation of the yen should significantly boost the profitability of the NAND business," J.P.Morgan said in a note. The broader Topix fell 0.5 percent to 900.60 in relatively active trade in the morning session, with 72 percent of its full daily average for the past 90 trading days. Other notable gainers included Olympus Corp, up 6 percent at 1,973 midday after UBS Securities started its coverage with a "buy" rating and a target price of 3,000 yen, against Monday's close of 1,862 yen. The company on Monday submitted to the Tokyo Stock Exchange a written affirmation on its internal control systems as stipulated in the securities listing regulations, which, if approved, will see the camera maker's "securities on alert" status lifted. It was placed on that status following an accounting scandal that broke in late 2011.