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Auto stocks lead rally on reduced U.S. import levy

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Bank shares gain as BOJ rate hike bets increase

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Markets shake off report Japan PM Ishiba to resign

(Updates prices, adds one-year high for Nikkei)

By Kevin Buckland

TOKYO, July 23 (Reuters) - Japanese automakers led a

surge in the Nikkei share average to a one-year peak on

Wednesday, while bonds slid after Tokyo reached a trade deal

with Washington, ending a months-long stalemate.

The Nikkei rallied as much as 3.3% to 41,070.91, its

highest since July last year. The Tokyo Stock Exchange's

transport equipment index soared 10.3%, with Toyota

Motor ( TM ) surging more than 13%.

The trade deal reduced economic uncertainty, bolstering the

case for the Bank of Japan to resume raising interest rates.

Traders sold Japanese government bonds, pushing two-year

yields up by 7 basis points (bps) to 0.82%, the

highest since April 2, when U.S. President Donald Trump shocked

markets with his aggressive "Liberation Day" tariff

announcement.

Markets largely shrugged off a media report that Japanese

Prime Minister Shigeru Ishiba would step down by the end of

August.

Ishiba is facing growing opposition from within his Liberal

Democratic Party for his vow to stay in power despite the ruling

coalition's defeat in Sunday's upper house election.

The yen was last down about 0.2% at 146.96 per dollar

.

Trump said on Tuesday the U.S. and Japan had struck a trade

deal that includes a 15% tariff that will be levied on U.S.

imports from the Asian country, down from a threatened tariff of

25%.

Industry and government officials briefed on the agreement

said the deal also lowers the tariff to 15% from 25% on Japanese

autos, which account for more than a quarter of the country's

exports to the U.S.

"It is commendable that the 25% baseline tariff was

avoided," said Norihiro Yamaguchi, senior Japan economist at

Oxford Economics in Tokyo. "Lowered uncertainty will be welcomed

in the equity market."

Bank shares gained, sending the TSE's banking index

up 4.5%.

The 10-year JGB yield jumped 9.5 bps to

1.595%, matching last week's 17-year high.

Ten-year Japanese government bond futures tumbled

as much as 1.04 yen to 137.56 yen, their lowest since March 28.

Deputy BOJ Governor Shinichi Uchida said the central bank

needs to focus on downside risks to the economy. His comments

came ahead of a BOJ policy meeting next Wednesday and Thursday.

"I don't think this (trade deal) alone will lead to a Bank

of Japan rate hike next week, but the possibility of a rate hike

between September and October has increased," said SMBC chief

currency strategist Hirofumi Suzuki. "This will create pressure

to buy the yen."

(Reporting by Kevin Buckland; Editing by Himani Sarkar, Rashmi

Aich and Subhranshu Sahu)