TOKYO (REUTERS) - Japan's Nikkei share average rose to its highest level since July 2008 on Thursday, and while the market pared some of the gains by the mid-day break, the underlying mood remained buoyant after the central bank's unprecedented stimulus measures announced last week.

Gains were capped before a psychological resistance level at 13,500 as investors were cautious against the steep rises in the market.

Reflationary stocks such as developers and financials, which outperformed in morning trade, succumbed to profit-taking by the midday break.

The Nikkei rose 0.8 per cent to 13,398.41 at the midday break after earlier rising to 13,496.28, the highest since July 2008. The index currently trades 6.5 per cent above its 25-day moving average of 12,521.86.

The insurance sector rose 4.7 per cent and was the best sectoral performer on optimism spurred by Prime Minister Shinzo Abe's effort to revive the domestic economy through bold monetary and fiscal expansionary policies.

Dai-ichi Life Insurance Co jumped 5.2 per cent and T&D Holdings Inc soared 4.8 per cent.

On the other hand, financials and asset-related shares, which were higher earlier, gave up their gains as investors locked in profits.

Mitsui Fudosan Co dropped 0.2 per cent after rising as high as 4.5 per cent and Mitsubishi Estate Co fell 0.7 per cent after gaining 3.7 per cent. Mitsubishi UFJ Financial Group added 0.9 per cent after rising as high as 2.7 per cent.

As for exporters, traders said that investors are being selective and they prefer autos to electronics as they are highly competitive in the global market.

Toyota Motor Corp rose 4.5 per cent, Honda Motor Co gained 3.3 per cent, while Sony Corp added 0.8 per cent.

Panasonic Corp soared 4.9 per cent after JPMorgan initiated coverage at 'overweight', saying that its strategic shift to business customers should eventually lead to sustainable earnings and top-line growth.

The Topix gained 1.2 per cent to 1,134.18.

The massive stimulus steps unveiled by the Bank of Japan last week and the government's fiscal expansionary measures have continued to drive demand for Japanese equities.

The Nikkei has surged over 50 per cent since November and the yen has fallen to four-year lows versus the dollar on the back of the bold monetary and fiscal expansionist policies.

Before the opening bell, Japan's February machinery orders data was out, which rose at the fastest pace in since mid-2011 in a sign that capital spending could pick up this year.

"It may take a while to see companies increase capital spending, but the figures were generally good," said Mr Masaru Hamasaki, a senior strategist at Sumitomo Mitsui Asset Management.

But further gains in the Nikkei will likely depend on the yen's move, he said.

"As long as the dollar is hovering just below 100 yen (S$1.24), investors may not chase the market higher. The 100-mark is a big milestone, so if it reaches that level, more buying will be seen."

The yen last traded at 99.41 yen to the dollar. On Wednesday, the dollar hit a four-year high of 99.88 yen .