* Despite upbeat earnings, yen's rise poses risk to shares
* Topix continues to outperform Nikkei on small-cap strength
* Mazda rises on Toyota tie-up news, Suzuki soars on earnings
By Ayai Tomisawa and Hideyuki Sano
TOKYO, Aug 4 (Reuters) - Japan's Nikkei share average slipped on Friday as the yen's rise to seven-week highs overshadowed optimism on corporate earnings, while Mazda Motor rose ahead of an expected announcement of a capital alliance with Toyota Motor.
The Nikkei shed 0.4 percent to 19,952.33, but stayed flat on the week. The trading range in which it has remained since mid-June has narrowed.
A surprisingly soft reading on the U.S. services sector sapped risk appetite and helped to bring down the dollar to a seven-week low of 109.85 yen on Friday.
"If the dollar falls below 110 yen, many companies will have to change their assumption on the exchange rates. That means risk of downward revision to the current optimism on earnings. We are at a watershed now," said Seiki Orimi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Japanese companies that have reported quarterly earnings so far saw a 12.9 percent rise in operating profit, with 60 percent of them beating market expectations, according to Okasan Securities.
Market players also noted, however, that many shares tended to fall, or quickly lose gains, even if their earnings were in line with expectations.
Shares of Kirin Holdings fell 4.5 percent on Friday after Japan's largest beverage company by market value raised its annual operating profit outlook by 4.1 percent, slightly less than analysts had expected.
Lion fell 6.7 percent after the earnings of the manufacturer of toothpaste and other toiletry goods came in line with expectations.
On the other hand, Suzuki Motor jumped 8.7 percent after the automaker's profits for the quarter beat market expectations.
Among other automakers, Mazda Motor ended 2.8 percent higher after a source told Reuters that the automaker and rival Toyota Motor Corp are expected to announce plans on Friday to build a $1.6 billion U.S assembly plant as part of a new joint venture.
The Nikkei business daily reported in its online edition earlier that Motor will issue new shares to Toyota as part of an agreement that will see Toyota take a roughly 5 percent stake in its smaller rival.
Toyota shares dropped 0.1 percent.
The broader Topix fell 0.2 percent to 1,631.45, maintaining its outperformance versus the Nikkei since June thanks to strength in small-cap shares.
The so-called NT ratio, which measures the Nikkei's value relative to the Topix, fell to 12.23, its lowest level since February 2016. (Editing by Lisa Twaronite)