Tariff negotiations "surrender," Shih Po-Mao resigns, why did Japanese stocks soar and Japanese bonds fall?

After U.S. President Donald Trump announced a trade agreement with Japan, news also emerged that Japanese Prime Minister Shigeru Ishiba plans to resign. The Japanese stock market surged significantly on Wednesday (July 23), while government bonds plummeted. This dynamic reflects investors' positive response to the elimination of tariff uncertainties and changes in political leadership.

According to CCTV News, on July 22 local time, U.S. President Trump announced via social media that the U.S. and Japan had reached a trade agreement: the tariff rate on Japan is 15%, and Japan will invest $550 billion in the U.S. This level is lower than the 25% that investors had previously feared. Following the announcement, Japan's benchmark stock indices, the Tokyo Stock Exchange Index and the Nikkei 225, both rose by more than 3%, with automotive stocks seeing particularly notable gains; Mazda Motor's stock price surged by 18% at one point, and Toyota's stock rose by over 15%.

Meanwhile, Japanese government bond yields rose sharply, with short-term bond yields climbing reflecting the market's increased expectations for a central bank interest rate hike this year, while long-term bond yields rose due to concerns over increased government spending. The yield on 10-year government bonds increased by 9.5 basis points to 1.595%, approaching the highest level since 2008.

Analysts believe that rumors of Ishiba's resignation have added optimism to the market. Following the election defeat on Sunday, investors expressed concerns about his fiscal policy direction. The market generally believes that a change in leadership will have a positive impact on the Japanese stock market.

Tariff Agreement Eases Market Concerns

According to previous articles from Jiemian, sources within the Japanese government revealed that in the results of the Japan-U.S. tariff negotiations, the U.S. will impose a 12.5% tariff on cars imported from Japan, halving the previous level of 25%, plus a basic tariff rate of 2.5%, totaling 15%.

Media reports indicate that the 15% tariff level announced by Trump is significantly lower than the market's previous expectations. Rajeev de Mello, a portfolio manager at GAMA Asset Management, stated:

"After weeks of uncertainty, business and financial investors finally have more certainty."

Andrew Jackson, a Japanese equity strategist at Ortus Advisors, pointed out:

Many investors had previously expected tariffs to be at least 20%, so the new tariff level is a better-than-expected outcome, as reflected in the rise of automotive stocks.

The Japanese automotive industry had previously "faced a lot of short selling" due to tariff concerns, and Wednesday's news constitutes a significant positive development. Approximately 50% of Mazda Motor's revenue comes from the North American market, making its stock price increase particularly notable Automakers have become the biggest beneficiaries of this surge. Mazda Motor's stock price soared by as much as 18%, with about 50% of the company's revenue coming from the North American market. Toyota Motor rose more than 15%.

Political Changes Bring Additional Optimism

Rumors of Shigeru Ishiba's resignation have brought additional optimism to the market. Gerard Cawley, manager of the Polar Capital Japan Equity Fund in London, stated:

"The market is more hopeful for Ishiba's departure, allowing someone else to take over. At least this way, investors will know what the competitive environment looks like."

According to a previous article by Jianwen, investors were concerned about Ishiba's fiscal policy direction after he lost the majority in the House of Councillors in the Sunday elections. Analysts pointed out that expectations of a leadership change have eased market concerns about policy uncertainty.

However, some observers warn that the boost in sentiment may be short-lived. Carol Kong, a strategist at the Commonwealth Bank of Australia, stated:

"Now that an agreement has been reached, I expect the market to refocus on Japan's fiscal outlook, with risks leaning towards further weakness in Japanese government bonds and the yen."

However, according to media reports, based on Trump's statements, the agreement will require Japan to invest $550 billion in the U.S. Hiroshi Watanabe, head of Tokyo Financial Market Research at Sony Financial Group, believes:

"Japan's commitment to invest $550 billion should be a strong negative factor for the yen, as it implies capital outflow, which could have negative long-term effects on the Japanese economy."

Rate Hike Expectations Push Up Bond Yields

After Trump announced the U.S.-Japan tariff agreement, Japanese Prime Minister Shigeru Ishiba stated during a live press conference on July 23 that Japan and the U.S. had reached an agreement on tariffs, with the U.S. imposing a 15% tariff on Japan and increasing imports of U.S. rice.

Following the U.S.-Japan tariff agreement, market expectations for a rate hike by the Bank of Japan this year have surged significantly. Overnight index swaps indicate that investors believe the probability of a rate hike by the central bank before the end of the year has jumped from about 59% the previous day to 84%.

Inadome Katsutoshi, a senior strategist at Sumitomo Mitsui Trust Asset Management, stated:

"The announcement of the U.S.-Japan trade agreement will be a factor for rising yields, as it will make it easier for the Bank of Japan to raise interest rates."

Meanwhile, demand for 40-year government bonds at auction has hit its weakest level since 2011, highlighting market concerns about increased government spending. As the Bank of Japan gradually reduces its large-scale bond purchases, yields have risen to multi-year highs.

According to a previous article by Jianwen, the ruling coalition led by Prime Minister Shigeru Ishiba suffered losses in the House of Councillors elections, exacerbating investor concerns about Japan's fiscal outlook, leading to a noticeable decline in the Japanese government bond market