(Updates prices as of midday trading recess; adds analyst

quote)

By Kevin Buckland

TOKYO, July 24 (Reuters) - Japan's Topix index climbed

to a record high on Thursday and the Nikkei share average hit a

new one-year peak, as stocks rallied for a second straight

session after Tokyo struck a long-awaited trade deal with

Washington.

The Topix advanced as much as 2% to reach 2,984.25

for the first time ever. The Nikkei gained as much as 2%

to 42,004.92, crossing the psychological 42,000 mark for the

first time since July of last year.

The trade deal announced late on Tuesday by U.S. President

Donald Trump reduced a reciprocal rate and autos-specific levies

to 15%, from the 25% Washington had threatened previously.

The Topix transport equipment index gained 1%,

adding to the previous session's nearly 11% surge.

The rubber index, which includes tyre makers,

jumped 3.4% after advancing 2% a day earlier.

On Wednesday, the Topix gained 3.2% and the Nikkei climbed

3.5%.

"Given the swift and favourable tariff agreement, we view

these updates to be positive for Japanese equities," Dan Hurley,

portfolio specialist at T. Rowe Price, said in emailed comments,

adding that he maintains a "constructive" view of the market on

a three- to-five-year horizon.

"This trade deal with the U.S. reaffirms the relationship on

both strategic and economic levels."

Banks stood out, with the sectoral Topix index

jumping 3.6% after a 4.4% rally on Wednesday.

Lenders have been buoyed by bets that the economic clarity

offered by the tariff deal will allow the Bank of Japan to

resume interest rate hikes later this year.

The central bank will meet on policy on Wednesday and

Thursday of next week, but traders are eyeing October for a

potential rate hike, putting the odds at about a coin toss.

Benchmark 10-year Japanese government bond yields

stood at 1.6% on Thursday, matching the high from

Wednesday, a level unseen seen since October 2008.