Some investors have already started pouring money into European stocks and bonds amid a bright outlook for the European Union's single currency, which debuts next January 1.

But some fund managers said it would not be too late to invest there after waiting to gain a clear picture of the unified European financial market and tax system.

"We have an interest (in increasing investments in EU nations' bonds), but it looks premature to do so due to uncertainty over the development of the secondary market," said Hideo Takemura, general manager of the bond portfolio management department at Partners Asset Management Co Ltd.

He said one of the biggest concerns was the tax system. EU nations are trying to harmonise their tax systems regarding interest earned on investments, in a bid to closeloopholes. Under their current plan, each EU member state could choose between imposing a withholding tax of a minimum 20 per cent, or providing information on investors' earnings to the tax authorities of other EU member states. Tax regimes vary widely across EU countries, with many of them now exempting withholding tax.

Nations such as Luxembourg and Britain are seen opposing the taxation idea, analysts said, due to fears of capital flight that could dry up liquidity in their secondary markets.

The tax system would be applied only to EU member states, and Japanese investors could be exempted, analysts said. But Japanese fund managers are concerned whether such exemptions would be applied to them at the outset or whether they would be refunded taxes after first paying them. Fund managers said Japanese investors who purchased securities in some European nations had withholding taxes levied on them, and then had to go through complex and time-consuming procedures to get refunds.

Partners' Takemura saidsuch practices had kept Japanese investors away from investing in some European nations. "Fixed-income investors are traditionally timid. And the biggest concern is taxation," Takemura said. "But once these tax issues are settled, there is a possibility that Japanese investment in EU nations will go into full swing," he said. Takemura said investors may shift funds to EU nations from battered emerging markets and the Japanese government bond market, where the benchmark 182nd bond yield recently hit a record low 1.115 per cent.

Nippon Dantai Life Insurance Co Ltd, well known in currency markets for its active trading, said it planned to increase its ratio of European government bond holdings while reducing that of US treasuries.

"If taxes and other remaining issues are cleared up, there is a chance that our European bond holdings may rise to 20 per cent of our total foreign currency-denominated assets from the current 10 per cent," said Masanori Mizoguchi, general manager of securities investment at NipponDantai.

Nippon Dantai and other Japanese investors have already started investing in assets in EU nations on growing expectations that the euro will be launched as a stable and strong currency, he said.