Ironically, such hedging involves selling the euro forward, which means the institutions will be adding to the problem in the short term. However, analysts note that by hedging these institutions are showing a commitment to hold the debt through thick and thin, which should be positive for the euro in the longer term."They have increased their pace of selling euros to hedge their foreign exchange risks, which might drag the euro lower in the near term," said manager of the investment strategy division at Tokyo-Mitubishi Securities Shinichi Sato.

Expectations can often become self-fulfilling with currencies, since if investors expect a currency to keep falling they will tend to hedge their exposure by selling it forward. That in turn redoubles the pressure on the currency, leading to the very falls they fear. "But their interest in the euro zone, especially euro-zone bond markets, is still intact given rosy economic conditions in the region. That's why they are holding on to euro assets," Sato said.

The Japanese love affair with euro debt began in the lead upto the euro's launch in January 1999, when the airwaves were still full of hype about how successful the new currency would be, a true contender with the dollar for global capital. But the relationship has been sorely strained in the last 18 months as the euro plunged some 25 per cent against the yen, so savaging the yen value of institutions' euro holdings.

Recently Japanese institutions have dipped a toe back in the euro market, picking up a net 498.8 billion yen of euro bonds in Germany, the Netherlands, France and Luxembourg in May, according to latest data released by the ministry of finance.

-- (Reuters)