July 23 (Reuters) - Euro zone government bond yields

rose on Wednesday, as Japan's trade deal with Washington revived

hopes of further agreements and eased concerns over the impact

of U.S. tariffs.

Euro area borrowing costs fell over the past two sessions as

investor focus shifted to the deflationary fallout from

potential U.S. trade duty increases and a strengthening euro.

U.S. President Donald Trump struck a trade deal with Japan

that lowers tariffs on auto imports and spares Tokyo punishing

new levies on other goods in exchange for a $550 billion package

of U.S.-bound investment and loans.

A rally in Japanese shares led Asian markets and European

stock futures on Wednesday.

Germany's 10-year government bond yield, the

euro area's benchmark, was up 2.5 basis points (bps) at 2.61%,

after dropping more than 10 bps in the last two sessions.

German 2-year government bond yields - more

sensitive to expectations for European Central Bank policy rates

- rose 1.5 bps to 1.81%.

Money markets are fully pricing in one 25-bp ECB rate cut by

December, and around a 50% chance of that

move coming in September.

Italy's 10-year government bond yields were up 2

bps at 3.48%, with the spread between BTP and Bund yields - a

market gauge of the risk premium investors demand to hold

Italian debt - at 86.5 bps. It hit 84.20 bps in June, its lowest

since March 2015.