*

Tenors up to 10 years advance as prime minister vows to

stay on

*

Longer-dated JGBs retreat ahead of 40-year bond sale on

Wednesday

*

Fiscal worries could reassert selling pressure on bonds,

SMBC

says

(Updates prices following the close of futures trading, adds

additional analyst comment, bullets)

By Kevin Buckland

TOKYO, July 22 (Reuters) - Shorter-dated Japanese

government bonds rose on Tuesday as investors returning from a

long holiday weekend assessed the fiscal implications of the

ruling coalition's election defeat.

The market was also supported by rallies in European and

U.S. bonds on Monday.

At the same time, longer-dated JGBs retreated ahead of an

auction of 40-year bonds on Wednesday.

Benchmark 10-year JGBs advanced, pushing yields

down 2 basis points to 1.5% as of 0714 GMT.

The two-year JGB yield declined 1.5 bps to

0.75%, and the five-year yield slipped 2 bps to

1.02%.

Ten-year JGB futures ended the session 0.25 yen

higher at 138.60 yen.

Japan's ruling coalition lost control of the upper house in

Sunday's election, a widely anticipated setback that further

eroded the authority of Prime Minister Shigeru Ishiba, who lost

his majority in the more powerful lower house in October.

While the ballot does not directly decide the fate of

Ishiba's administration, and the embattled leader has vowed to

stay on for now, it could lead to policy paralysis or a bigger

fiscal deficit, with leading opposition parties calling for

debt-funded consumption tax cuts to ease the burden of rising

living costs.

Ishiba has rejected calls for tax cuts in favour of cash

handouts, paid using tax revenues, and Finance Minister

Katsunobu Kato reiterated on Tuesday the government's stance

that sales tax cuts are not appropriate.

Japan has the largest debt burden in the developed world at

about 250% of its gross domestic product.

The fact that the coalition avoided a worst-case scenario

with the election result led investors to unwind bearish JGB

bets on Tuesday, according to Nomura's head of macro research,

Yunosuke Ikeda.

"The fiscal outlook is much better now than before the

election," Ikeda said.

"That may help avert a big disappointment at tomorrow's

40-year auction."

Last Tuesday, the 10-year JGB yield rose to the highest

since October 2008 at 1.595% after opinion polls increasingly

pointed to opposition gains. The 30-year yield

shot to an all-time peak of 3.2%, and the 20-year yield

leapt to the highest since November 1999 at

2.65%.

In the latest session, the 20-year yield added 1 bp to

2.535%, while the 30-year yield rose 1.5 bps to 3.085% and the

40-year yield moved up 2 bps to 3.375%.

Daisuke Uno, chief strategist at Sumitomo Mitsui Banking

Corporation, said upward momentum in long-dated yields could

build again.

"The election defeat shows that the consensus among voters

is 'no' to cash handouts, meaning that the consumption tax cuts

advocated by opposition parties are looking more likely to be

realised, although the scale and duration would still need to be

determined," he said. "The political situation remains fluid."

(Reporting by Kevin Buckland; Additional reporting by Mariko

Sakaguchi; Editing by Mrigank Dhaniwala and Subhranshu Sahu)