There has been an affectionate relationship between France and Japan for a long time. It began in the mid-19th Century, when Japanese art treasures reached Paris, providing inspiration for painters such as Edouard Manet and Edgar Degas. The French still use the word Japonisme to describe their deep appreciation of Japan’s culture. In return, the Japanese hold France’s achievements in fashion and food in high regard. They have a special place in their hearts for its exquisite patisseries.
Investors’ decisions are rarely sweetened by sentiment yet on the markets, France is currently back in fashion. Investors hope that the president-elect Emmanuel Macron will strengthen the French economy and many international traders share his vision of France at the heart of the European Union.
Mr Macron has promised to reduce the fiscal deficit to below three percent as soon as possible. That would please the creditors which hold French debt in the form of bonds, such as Japanese banks. Many bond traders pulled their money out of France when it seemed there was a chance the election could result in a victory for Mr Macron’s rival, the nationalist Marine Le Pen. However, in a sign of post-election relief, the ten-year yield on French bonds has returned to a rate not since late last year, signaling that the risk of political turbulence, or even debt default, has dissipated.
In theory, a free trade agreement between Japan and the EU is more likely under Mr Macron than under Ms Le Pen. However, it requires support across the EU, not just in France. Another challenge for Mr Macron is his low support within the French National Assembly. His party, En Marche, was only formed 13 months ago and this constrains his ability to push controversial trade legislation through the French parliament.
Britain supported a free trade deal between Japan and the EU but the UK’s influence on the EU’s policy disappeared with the Brexit vote last year. Since then, France has been trying to lure financial jobs from London. It hopes to attract 20,000 workers to Paris; people who work in Japanese banks are among those being courted.
The banks’ decisions on where to locate depends partly on the prospects for departments which clear euro-denominated instruments, such as derivatives. Much of this trade currently takes place in the City of London. However, the European Commission is considering a curb on euro clearing outside the EU. If it does decide to put a block on that trade in London, it could have a big impact on the Japanese banks located in Britain.