* Nikkei hits 32-month closing high, Topix climbs 2.2 pct * More upside expected in coming months - analyst By Tomo Uetake TOKYO, Jan 25 (Reuters) - Japan's Nikkei average jumped 2.9 percent on Friday to log an 11th straight week of gains, its longest such run since 1971, after a drop in the yen to a 2-1/2-year low against the dollar spurred exporters higher and fuelled optimism about earnings. The Nikkei 225 scored its biggest one-day gain in nearly two years to end at 10,926.65, its highest close in 32 months. "The Nikkei surged because of a softer yen following positive surprises in U.S. data, especially the jobless claims," said Hiroyuki Fukunaga, chief executive of Investrust. The yen tumbled to 90.695 to the dollar on Friday after new claims for U.S. jobless benefits dropped to a five-year low last week, prompting investors to buy dollars. A senior Japanese official also spurred the yen's decline by saying the government had no problem with the dollar hitting 100 yen. Japanese exporters, which benefit from a softer yen as it increases the value of earnings repatriated from overseas and boosts their international competitiveness, led the gains on Friday. Sony Corp surged 8.5 percent, Toshiba Corp jumped 5.3 percent and Fuji Heavy Industries climbed 3.1 percent. Analysts have raised their profit forecasts for currency-sensitive exporters and foreign investors ploughed $17 billion into the market in December, the biggest monthly inflow since 2010. Bank of America Merrill Lynch picked Japanese equities as the only short-term "buy" among equities worldwide, saying that the government's aggressive monetary easing and economic policies would help to spur gains. "The great rotation has begun and the big picture is transitioning from deflation and deleveraging to a normalisation of growth, rates and risk appetite," Merrill said in a note. The brokerage also said that recent bullishness has made the market ripe for a correction, but that if individual investors continue to pile in and push up prices it would risk a steeper fall in the spring. MORE UPSIDE Trading volume has also risen with the stepped-up buying by individual investors, after regulations on margin trading were relaxed at the beginning of January to allow them to use the same collateral to back multiple margin trades in the same day. "It's led to much higher volatility, which simply means that when the market falls it's that much steeper or when it rises it can also be dramatic," said a senior hedge fund manager. The broader Topix climbed 2.2 percent to 917.09 in active trade, with the day's volume, at 3.34 billion shares, recovering nearly to last week's daily average of 3.73 billion shares after a largely lacklustre week. The Nikkei has rallied 26 percent since mid-November on expectations that Japan's new prime minister, Shinzo Abe, will pursue bolder policies to tackle prolonged deflation in the world's third-largest economy. The market's steep climb stalled earlier this week after a policy move by the Bank of Japan disappointed investors who had expected far more aggressive easing measures. Some 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. "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," he said. But others said this earnings season may not be as good as some expect. Nidec Corp lost 1.7 percent after it lowered its earning guidance. "There may not be such significant improvement in companies' topline data ... I expect that many will maintain their conservative earnings outlook," Fukunaga of Investrust said. "If the yen's weakness is the only good factor for a company, there's not much incentive for investors to support a P/E which is more than 18 times."