Japan's Nikkei surged to 11-week highs on Tuesday morning after a trade agreement reached between the United States and Mexico lifted investor risk sentiment and triggered buying in automakers. The Nikkei share average rose 0.6 per cent to 22,944.77 at the midday break, after briefly touching the 23,000 level.

The United States and Mexico had agreed on Monday to overhaul the North American Free Trade Agreement (NAFTA), putting pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the three-nation pact.

“Investors are relieved on receding trade worries but there are several other factors in the US that are raising sentiment for the Japanese market,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

“The US economy is strong, its corporate earnings are bright while inflation is under control, so the environment is favourable for risky asset investors.”

He said one concern is that trading volume and turnover have been thin in the Japanese market, even though hedge funds are seen buying back Japanese stocks that they sold a few weeks ago. “Unless trade becomes more active, the Nikkei is unlikely to rise and stay above 23,000,” Fujito said.

Shares in Japan's top three automakers, which have plants in Mexico, surged on Tuesday. Toyota Motor Co advanced 1.9 per cent, Nissan Motor Co soared 2.2 per cent and Honda Motor Co rose 2.3 per cent. Autoparts makers followed suit, with Denso Corp up 3.3 per cent, Aisin Seiki gaining 2.4 per cent, and Jtekt Corp rising 2.5 per cent.

Investors also took heart from news that the Toyota group of companies said they would form a joint venture to develop software that manages brakes, steering and other components for automated driving. The broader Topix gained 0.7 per cent to 1,740.36.

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