* Japanese net buying in Italy, Spain bonds highest after debt crisis in Sept
* Buying still modest, mostly by small players
* Euro zone periphery debt investments may rise as U.S. debt shunned
By Hideyuki Sano
TOKYO, Nov 11 (Reuters) - Japanese investors are tiptoeing back to peripheral euro zone debt markets, government data showed on Monday, on a view that the worst is over for the debt crisis and accommodative monetary policy to support growth will bolster debt prices.
Japanese investors bought a net 35.0 billion yen ($353 million) in Italian bonds in September, their first net buying in six months and largest since June 2011, when they bought a net 60.5 billion yen.
Their net buying in Spanish debt was 46.5 billion yen, the highest level since 65.5 billion yen in March 2011.
“We’ve been having an increasing number of inquiries on Italian and Spanish debt from investors in the past couple of months,” said Hiroki Shimazu, senior market economists in charge of foreign bonds at SMBC Nikko Securities.
The spread of Italian debt over German bunds has halved from their peak, almost coming back to pre-crisis levels before July 2011, when the Italian debt yield surged.
The size of Japanese buying is still small compared with the volume of their sales during the crisis and of purchases before that.
During the peak of the euro zone crisis — from July 2011 to September 2012 — Japanese investors sold 1.581 trillion yen of Italian bonds and 374 billion yen of Spanish bonds.
Buying also came mostly from some risk-tolerant pension funds and foundations while many big institutional investors, such as banks and insurers, are still cautious, analysts said.
Many of these big investors only buy debt with credit ratings of A or above, meaning Italy and Spain are off-limits to them, with their credit rating of BBB and BBB minus respectively.
Yet, some big players are changing their attitude as well. Mitsui Life, Japan’s fifth-largest life insurer with total assets of 6.6 trillion yen, said last month they bought short-term Italian bonds because their yields were attractive.
Interest in peripheral euro zone debt could grow further as Japanese investors seek to shift some money out of U.S. debt on the view that prices could fall as the U.S. economy recovers and the Federal Reserve gradually winds back its stimulus.
In contrast, investors think the European Central Bank, which surprised markets by cutting interest rates just last week, will need to continue to shore up the fragile euro zone recovery with an easy stance.
“On the whole, there is a shift to the euro zone from the U.S. and some of the money is finding its way to periphery markets, although I believe a majority of their funds will go to semi-core countries,” said Tomoaki Shishido, fixed income analyst at Nomura Securities.
While German bonds have long been a favourite of Japanese investors, they have recently been pouring money into higher-yielding bonds in other euro zone countries.
From January to September this year, Japanese investors bought a total of 1.132 trillion yen in French debt, 1.054 trillion yen in Dutch debt and 221 billion yen in Belgian debt. Their net buying of German debt was 312 billion yen.
In the same period, Japanese investors sold 4.0 trillion yen of U.S. debt.
$1 = 99.0800 Japanese yen Editing by Jacqueline Wong