The firm, also known as Kampo, holds 76.8 trillion yen ($707 billion) of assets and has limited exposure to Italian debt after having reduced its holdings by two-thirds before the country's election on March 4, Atsushi Tachibana told Reuters.

"We are looking to buy short-term Italian bonds now," Tachibana said, adding that he expects volatility to remain high and present good buying opportunities when the market overreacts.

Kampo's current Italian debt exposure amounts to 1 percent of its total foreign debt holdings. That would suggest about 70 billion yen (483.8 million pounds) based on its latest disclosure, which puts its holdings of foreign bonds at around 7 trillion yen.

"We thought Italian political risks were underestimated when the two-year Italian yield was so close to the German yields ahead of the election," Tachibana said.

The two-year Italian debt yield was around minus 0.10-0.20 percent, compared to minus 0.60 percent , just before the inconclusive election.

It spiked to almost 3 percent on Tuesday, marking the biggest one-day rise since 1992, after the two anti-establishment parties clashed with the country's president who rejected their choice of an eurosceptic economist as finance minister.

Tachibana said Japan Post sought to buy some Italian bonds on Wednesday only to be hindered by wide bid-offer spreads.

"The market seemed to be overreacting. I don't think Italy would default on its debts."

Kampo is the insurance arm of formerly state-owned conglomerate Japan Post Holdings and has been increasing investments in riskier assets since it was partially privatized in 2015.

In the last financial year, it was one of the most aggressive buyers of foreign bonds among Japanese insurers, boosting its holdings by 1 trillion yen.

Japan's largest private insurer Nippon Life, which holds some 4.8 trillion yen ($44 billion) worth of euro zone bonds, said on Wednesday it had no plans for now to buy or sell its Italian debt holdings.

Since the middle of last year, many Japanese investors have been piling into European bonds because their yields after currency hedging are attractive.

From October to March, Japanese investors bought 1.57 trillion yen of German bonds, 2.09 trillion yen of French bonds, 695 billion yen of Spanish bonds and 266 billion yen of Irish bonds.

But Japanese investors have taken a cautious stance on Italian bonds in the past half year, buying only 52 billion yen.

(Reporting by Tomo Uetake and Hideyuki Sano; Editing by Shri Navaratnam and Kim Coghill)

By Tomo Uetake and Hideyuki Sano