US-Japan trade deal spurs market rally - BBH

US and Japan reached a trade agreement. Under the deal, Japanese goods will face a 15% tariff, up from 10% but down from a threatened 25%. The levy on Japanese auto exports to the US will be reduced to 15% from 25%, BBH FX analysts report.

Yen gains, but BOJ tightening path remains measured

"The trade deal reduces downside risk to Japan's economy and markets reacted accordingly. JPY had a kneejerk upswing, the Nikkei surged and JGB yields rallied across the curve. 40-year JGB yields led the rise after a disappointing auction. The 40-year bond sale's average bid-to-cover ratio was 2.13, the lowest since 2011."

"Bank of Japan (BOJ) Deputy Governor Shinichi Uchida stuck to the bank's tightening bias. Uchida noted that 'if the outlook for economic activity and prices is realized, the Bank...will continue to raise the policy interest rate and adjust the degree of monetary accommodation'. Uchida later added in response to the US-Japan trade agreement, 'This is a major step forward. It will lead to reduced uncertainty'. Indeed, Japan's swaps market raised odds of a 25bps hike to 0.75% by December to 80% from 64%. In the next two years, markets imply just 50bps of rate increases. In our view, the BOJ's cautious normalization cycle limits JPY upside."

"Japanese Prime Minister (PM) Shigeru Ishiba was forced to deny media reports that he was set to announce his intention to resign. Regardless, with an approval rating for his administration historically low just above 20% and after a crushing Upper House defeat, the PM's position has become untenable. If the PM resigns, a leadership contest will follow within the ruling party. Unless of a major change to Japan's fiscal trajectory, political uncertainty is unlikely to have significant financial market implications."