UPDATE 1-Japan public pensions turn net JGB sellers

(For more stories on the Japanese economy, click [ID:nECONJP])

* JGB yields show no immediate reaction to pension sales

* Japan's debt burden is worst among industrialised nations

* S&P warns of Japan downgrade as political turmoil spreads (Adds details, JGB yields)

By Rie Ishiguro

TOKYO, July 13 (Reuters) - Japanese public pensions turned net sellers of Japanese government bonds (JGBs) for the first time in nine years in the fiscal year that ended in March, the Nikkei business daily said on Tuesday.

The country's health, labour and welfare ministry estimates that pension reserves will continue to decrease at least until fiscal 2013/14, meaning public pensions, which hold more than 10 percent of outstanding JGBs, will have even less room to buy government debt, the Nikkei said.

Japan's outstanding public debt is the largest among industrialised nations, approaching twice the size of its gross domestic product, so any indication that there will be less investment flows into JGBs could be a troubling development.

Standard & Poor's said on Monday it could lower Japan's sovereign ratings if the government's fiscal position erodes further and that stabilising the political environment is a challenge for fiscal consolidation after voters handed the ruling Democratic Party a drubbing in an upper house election on Sunday. [ID:nTOE66B066]

The election has left fiscal and economic policy in limbo as the Democrats lost control of the upper house, meaning they can't pass legislation without compromising with opposition parties. The Democrats retain control of the more powerful lower house.

Government bonds shrugged off the report that pensions had turned net sellers. The benchmark 10-year yield dipped 0.5 basis point to 1.115 percent JP10YTN=JBTC.

Public pensions logged a net selling of 443.2 billion yen ($5 billion) in JGBs in 2009/10, the Nikkei said, citing Bank of Japan data. Pension reserves started to drop from 2006/07 and amounted to slightly less than 124 trillion yen at the end of March 2009, sharply below the peak level of 150 trillion yen, the paper said.

The Government Pension Investment Fund, one of the country's public pension funds, sold 720 billion yen in yen bonds to raise cash for pension payouts in the fiscal year that ended in March, according to data it disclosed on June 30. [ID:nT33114] (Editing by Joseph Radford)