CNBC's Kaori Enjoji and Lin Lin talk about the U.S.-Japan tariff deal, Prime Minister Shigeru Ishiba's fate and how the sentiment is playing out in the Japanese bond markets.

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Donald Trump has signed an order to impose tariffs imports into the U.S. from countries including China, Mexico and Canada.

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A recently concluded tariff agreement between the United States and Japan has reduced some economic uncertainty, particularly for the auto sector, which avoided a higher 25 percent tariff. However, the deal has introduced greater political uncertainty in Japan, with speculation about Prime Minister Shigeru Ishiba’s future intensifying after meetings with former leaders. Discrepancies exist between U.S. and Japanese accounts of the agreement, notably regarding defense purchases and agricultural quotas, with Japanese officials denying any defense commitments and maintaining existing rice import quotas.

The Japanese bond and equity markets responded strongly to the deal, with government bond yields reaching their highest point since 2008 and a notably weak 40-year bond auction. Investors remain concerned about potential fiscal expansion and leadership changes, as speculation grows about Ishiba’s resignation and possible successors. The Bank of Japan acknowledged the increased certainty brought by the deal but cautioned about ongoing global risks.

U.S.-Japan tariff deal: Discrepancies and market implications

Well, economic uncertainty a little bit alleviated, although 15 percent tariffs is no laughing matter for the auto sector. But the political uncertainty is actually greater now, I think, now that this deal has been done. And by that I mean Prime Minister Shigeru Ishiba's days are numbered. He had a powwow with three former prime ministers at the headquarters of the LDP yesterday, and he came out of that meeting and he said, no, we didn't discuss a thing about my future and whether or not I'm going to resign. I think no one in this country believed him at that point. And I think people feel that the clock is ticking and that Shigeru Ishiba's days are numbered, although the consensus seems to be, you know, there's an 80 year anniversary from the after World War Two coming up next month. And it seems this is something that's very close to his heart. So he may stay for that and possibly look at a LDP leadership race in September. But, you know, getting back to this deal, there's a little bit of discrepancy in what the U.S. is saying and what Japan is saying, particularly, I mean, one other issue is defense. So the U.S. side is saying Japan is going to buy more defense equipment. Akasawa-san, the lead trade negotiator who's coming back later on today, said after this meeting that, no, defense was not on the table. This is that is a security issue that has not been part of these trade negotiations. There's the other part about rice where the U.S. says they're going to increase the quotas. But the agricultural minister, the prime minister, said the minimum access rate of 770,000 metric tons that come to Japan from overseas in terms of rice without tariffs, that is going to remain the same. So they did protect their farmers. So that's another point of discrepancy. The auto sector, importing more cars from the U.S., I mean, yes, fine. Maybe they did agree on lower safety standards, although I don't think that's a huge concession in the big picture of things, given that very few U.S. cars are on the roads here anyway. It's mostly German cars. So I think net-net, Japan seems to have given away very little. But having said that, the uncertainty has now lifted, and that's why we see a huge reaction in the bond and equity markets yesterday. Lyn can run us through some of the reaction again on day two of this deal between the U.S. and Japan. Morning, Lyn. Yeah, good morning to you, Kaori. When we talk about Japan's government bond market, there's always a number of factors. But in the here and now, as you were just talking about, I think it is the political risks that have investors very concerned here. The concerns as well around further fiscal expansion. If we look at what happened yesterday in particular, we had that 10-year yield reaching the highest point since 2008. Among the flurry of headlines we were grappling with coming out of Japan as well, there was this 40-year bond auction, which many had predicted would likely show weak demand. But it ended up being worse because we saw that the demand came in at the weakest in about 14 years. So certainly, as one analyst said to me, this concern, particularly yesterday, nobody wanted to catch a falling knife because as the auction was happening, there were these lines coming out from domestic media, this speculation that the Japanese prime minister could be resigning or stepping down. As you say, he did come out and say that those headlines were not true. But the intense speculation still remains and there is still a very strong belief that sooner or later his position is not tenable. There is also then concerns around who will step into his place and what kind of agenda could they bring because one of the top contenders, of course, is Sanae Takeuchi. We know that she is in favour of potentially more fiscal stimulus as well. These are some of the concerns at the moment that's dampening interest in terms of the bond market. Kari? Yeah, exactly. I mean, it's not just Takeuchi-san, right? Given how well the opposition did in the elections on Sunday and they're calling for expansionary fiscal policy, the talk has now shifted to maybe they have to incorporate their views as well. And I think that's what we're seeing in the bond markets. But let's take it to the BOJ. Before this trade agreement, I think people were saying, no, no, they're not going to hike rates until maybe next year. Has that timetable shifted, moved forward a little bit as a result of this agreement? Yeah, so we did actually see when you look at the market pricing, the overnight index swap. So there was a bit of a jump in favour of one rate hike, at least one rate hike this year. And that was post the announcement in terms of the trade deal. The thinking, of course, behind that is that the trade deal means more certainty here. It also means that Japan avoids that worst case scenario, right, that they were staring down the potential of a reciprocal tariff at 25 percent, the autos at 25 percent as well. We did hear from the deputy governor of the Bank of Japan yesterday, and he said as much that this deal does bring some more certainty to the outlook in terms of the economy. But in typical Bank of Japan fashion, he did hedge his bets a bit as well and say, look, there is still lots of risks on the horizon, particularly in terms of the global economy. And we still wait, of course, to hear news about some of these other trade deals and what happens with China as well, Sherry.

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U.S.-Japan tariff deal: Discrepancies and market implications

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