From the documentation it seems it's not going to work:

http://www.juniper.net/techpubs/software/junos/junos84/swconfig84-vpns/swconfig84-vpns.pdf

says the following:

NOTE: A Layer 2 VPN or Layer 2 circuit is not supported if the 
PE-router-to-P-router
interface has VLAN-tagging enabled and uses a nonenhanced Flexible PIC 
Concentrator
(FPC).


the FPCs in the M7i routers are E-FPC, and I presume that E stands for 
enhanced.

but the PE routers are J4350 and I'm using the onboard GE ports for 
connecting, and show chasis hardware reports them as FPC and I suspect 
that this might be the problem.

Thanks.
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