* Despite index falls, gainers outnumber losers
* BOJ cuts amount of 5-10 year JGB purchases
By Ayai Tomisawa
TOKYO, July 24 (Reuters) - Japanese stocks dropped to more than two-week lows on Monday after Wall Street retreated and a stronger yen dampened sentiment, while investors looked for opportunities to buy small and mid-size stocks.
The Nikkei share average declined 0.6 percent to 19.975.67, the lowest closing level since July 7.
The broader Topix dropped 0.5 percent to 1,621.57 in thin trade, with turnover of only 1.9 trillion yen ($17.1 billion), the lowest level in a month.
But gainers outnumbered losers. While 1,061 issues rose, or 52 percent of the broader market, 812 issues declined.
"Investors were seen buying back small stocks on the dips," said Chihiro Ohta, general manager of investment research at SMBC Nikko Securities.
On Friday, Wall Street indexes ended flat to about 0.15 percent lower, pressured by disappointing earnings from General Electric and energy shares.
The dollar stayed on the defensive as the euro strengthened as markets wagered the European Central Bank is on track to start winding back its asset purchase programme in the not-too-distant future.
"The market is already cautious against the fact that the BOJ lags behind other central banks in tapering stimulus," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.
On Monday morning, the Bank of Japan cut the amount of five-to 10-year government bonds it purchased at its regular operation. It bought 470 billion yen ($4.24 billion) of the maturities, down from 500 billion yen at its last operation the previous week.
Shigemi said investors will continue to carefully monitor the pace of the BOJ's asset purchases, which could trigger a rise in the yen.
Last week, the BOJ once again pushed back the timing for achieving its ambitious inflation target, reinforcing views that it will lag well behind other major central banks in scaling back its massive stimulus programme.
Financial stocks underperformed, with Mitsubishi UFJ Financial Group falling 1.2 percent and Mizuho Financial Group 1.1 percent, while Dai-ichi Life Holdings declined 1.7 percent.
Exporters were sold down as well, with Toyota Motor Corp shedding 0.8 percent and Honda Motor Co sliding 1.1 percent.
Bucking the trend, condiment maker Kagome Co rose 1.5 percent after the company raised its profit outlook for the year ending December. It now expects an operating profit of 12.5 billion yen instead of 11.5 billion yen. ($1 = 111.12 yen) (Reporting by Ayai Tomisawa; Editing by Richard Borsuk)