By Sophie Knight TOKYO, Jan 21 (Reuters) - Japan's Nikkei share average dipped in morning trade on Monday as the Bank of Japan began a two-day policy meeting, stepping back somewhat after last week's rally to a 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' shares. Shares reversed from Friday's sharp gains, 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. Heavyweight Fast Retailing Co Ltd lost 2.1 percent after gaining 3 percent in the previous session, while the insurance sector dropped 1.7 percent after jumping 5.5 percent on Friday. The Nikkei fell 1.1 percent to 10,794.40, 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. "While there are very high expectations in the stock market, the trouble is that large manufacturers would be in trouble if the yen weakens too much, as energy costs would rocket." The electric and gas sector dropped 1.3 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 incident that may also hamper production. 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. Running against the market, Seiko Epson Corp advanced 4.1 percent after JP Morgan upgraded the printer maker to "overweight" from "neutral" and hiked its target price to 1600 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. Exporters were also off as the yen firmed to 89.5 yen to the dollar, leaving automakers Nissan Motor Co Ltd and Honda Motor Co Ltd both down 0.9 percent.