Japanese investors have been lured into the French financial markets recently by prospects of some of the highest returns in Europe that outstrip the risk of foreign exchange rate fluctuations.

France seems to be the latest target among Japanese investors, always on the lookout for fresh outlets for pent-up funds.The Japanese are attracted to the French market because it is "sexy" and "exotic," said Lee Parr, who works on the equities trading desk at Credit Lynonnais Securities (Japan).

France is the current focus of Japanese investors in the government bond market, said Hideo Takemura, deputy general manager of the international bond marketing department at Yamaichi Securities.

Investors here want to see the yield on the 8.5 percent French government long bond near 10 percent to compensate for foreign exchange risk, and French bonds are nearing that level, he said.

Late Thursday in Paris, the bond, due in 2019, was bid at a yield of 9.76 percent.

The French bond is likely to become more attractive to investors based on a statement made on Wednesday by Pierre Beregovoy, French finance minister, that French interest rates are declining in line with a drop in inflation.

Dealers in Paris said prices rose Thursday on fresh buying by overseas investors - including Japanese - based on the outlook for declining inflation and the strength of the French franc within the European Monetary System.

Moreover, Japanese buying in France has not been limited to the bond market.

There "is definitely a France mania going on" in the equities market, said Ms. Parr. While some of the boost stems from domestic support, most of it is coming from abroad, she said.

Volume in the French stock market has averaged between 2.5 billion and 3 billion francs a day this month, higher than the 2.5 billion average for past months and sharply up from 1.5 billion francs a day about 2 months ago.

Traders and analysts here attributed much of this growth to increased foreign participation.

In the French equities market, there has always been "good participation by lifes (Japanese life insurance companies)," but new interest by Japanese securities companies and individual investors herald "the beginning of a new wave in equity investment," Ms. Parr said.

For example, Nikko Securities will launch a French fund on Thursday. The Nikko fund will aim to collect 10 billion to 30 billion yen, of which 50 percent to 70 percent will be invested in equities and 30 percent to 50 percent in bonds.

Although the amount of Japanese money pouring into French bonds and stocks is small compared to overall financial dealings here, the flow is significant with respect to the size of the French markets.

For instance, the 30 billion yen target of the Nikko fund, worth about $190 million, pales in comparison to the Japanese presence in the U.S. Treasuries market.

However, a million franc order is a significant amount in the French market, said Mr. Takemura.