TOKYO, March 21 (Reuters) - Japan's Nikkei share average

hit a record high on Thursday and the yen rebounded strongly

from a four-month low, after the U.S. Federal Reserve stuck to

its easing path despite recent heated inflation readings.

The Fed's policy direction contrasts sharply with the Bank

of Japan, which on Tuesday ended eight years of extraordinary

stimulus measures with its first rate hike since 2007.

However, BOJ Governor Kazuo Ueda reiterated that policy

would remain broadly accommodative for the time being, in

comments to parliament on Thursday.

Short-term Japanese government bond yields ticked higher

amid expectations for tighter policy over the medium term, but

yields on the longest-dated sovereign paper fell as long-term

investors bought into this month's fiscal year-end.

The Nikkei entered the midday break up 1.67% at

40,670.52, after touching an all-time high of 40,748.77. For the

year, it is up 21.5%, far outpacing an 8.1% advance for the MSCI

world index.

The dollar was last down 0.5% at 150.505 yen,

after scaling 151.82 yen on Tuesday for the first time since

mid-November.

The BOJ and Fed policy announcements have given investors

the green light to buy stocks again, said Yunosuke Ikeda,

Nomura's chief equity strategist, based on the same three

underlying catalysts that drove gains for the past year: better

corporate governance, emergence from deflation, and concerns

about China that have drawn money into Japan.

"These factors are evolving somewhat, but basically

continuing from last year."

While the Fed's signal that it is still on track for three

quarter-point rate cuts this year puts it on the opposite path

from the BOJ, Japanese policymakers have stressed that any

further tightening would be very gradual.

The BOJ sees room for another hike this year, with market

players viewing July or October as potential dates, the Nikkei

newspaper reported.

"It's too early to say there's a risk of a July hike", which

would require sustained yen weakness despite Fed rate cuts and

possible Japanese forex market intervention, forcing the BOJ to

act, said Shusuke Yamada, chief Japan forex and rates strategist

at Bank of America.

In the medium term, dollar-yen could fall to 145 or lower if

BOJ hikes coincided with Fed cuts, he said.

However, demand for carry in the currency pair is likely to

spur dip buying, which could see a rise to 152, which is the

level when traders may become wary of intervention, he said.

In the JGB market, two-year yields rose 1.5

basis points (bps) to 0.185%, rebounding from Tuesday's two-week

low. Japanese markets were closed for a national holiday on

Wednesday.

The 20- and 30-year yields

fell 1 bp each, to 1.485% and 1.79%, respectively.

The 10-year JGB yield was flat at 0.725%,

holding at a two-week trough.

"Some people are trying to take account of the risk of early

action by the BOJ, which will keep the short end under

pressure," said Masayuki Kichikawa, chief Japan macro strategist

at Sumitomo Mitsui DS Asset Management.

But he warned against reading too much into market moves so

soon after the BOJ meeting.

"We're in some kind of transition period, and everyone needs

to get used to the new environment."