US-Japan Trade Agreement Sparks Market Optimism, Yen Gains as BOJ Stays Cautious

US-Japan Trade Agreement Sparks Market Rally, BOJ Signals Gradual Tightening

The US and Japan signed a new trade agreement, setting tariffs on Japanese goods at 15%—a middle ground between the current 10% and the previously threatened 25%. Specifically, the tariff on Japanese car exports to the US will drop to 15%, from a prior threat of 25%.

Market Response: Yen Firms, Yields Surge

Markets responded positively:

• JPY saw a sharp appreciation, reflecting reduced economic risk.
• The Nikkei 225 posted gains.
• Japanese Government Bonds (JGBs) rallied across the curve.

The standout move was in the 40-year JGB, which saw the lowest bid-to-cover ratio (2.13) since 2011, signaling reduced investor demand.

BOJ Commentary: Gradual Tightening Still in Place

BOJ Deputy Governor Shinichi Uchida maintained the central bank’s tightening bias, stating:

"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."

On the trade deal, Uchida added:

"This is a major step forward. It will lead to reduced uncertainty."

Following the remarks:

• Markets raised the odds of a 25 bps hike by December to 80%, up from 64%.
• However, only 50 bps of cumulative hikes are priced in over the next two years—highlighting the BOJ's cautious normalization path.

Outlook: Yen Gains May Be Capped

While the trade agreement has boosted short-term sentiment and strengthened the Yen, the BOJ’s slow normalization strategy likely limits any sustained JPY upside in the medium term.

Related Reads on Tredu:

• USD/JPY Falls After US-Japan Deal
• JPY Outlook After Ishiba Resignation Rumors