Nov. 10 (Bloomberg) -- Japan’s economy remains beset by deflation and investors are “jittery” about the nation’s bond market, said Robert Feldman, head of Japan economic research at Morgan Stanley in Tokyo.

“Japan has been in deflation, remains in deflation, and that’s one of the things that this new government has not talked very much about,” Feldman said today in a Bloomberg Radio interview. The government must bring “deflation and its relation to the employment problem into the center of the debate where it belongs.”

Japan’s economy shrank 6.7 percent in the second quarter, 7.8 percent in the first quarter and 3.6 percent in the fourth quarter last year, according to data released by Japan’s Cabinet Office in Tokyo.

Japan’s new Prime Minister Yukio Hatoyama came to office Sept. 16 after his Democratic Party of Japan won a landslide victory in an August election. The Democratic Party, which took over from the Liberal Democratic Party, is working to come up with a “new fiscal approach for Japan,’’ Feldman said. The Liberal Democrats ruled Japan for all but 10 months since 1955.

“We have global and domestic investors a little bit jittery about the JGB market right now, wondering if that new strategy will make any sense,” Feldman said, referring to the Japanese government bond market.

“We have a weak economy. We have worries about whether the current account will be here to protect the bond market, those are the things that investors are looking at right now,” he said.

Restrained Spending

The yield on the 1.3 percent bond due September 2019 fell half a basis point, or 0.005 percentage point, to 1.47 percent as of 4:29 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield earlier touched 1.485 percent, the highest since June 16.

Yields had climbed for four days. Finance Minister Hirohisa Fujii acknowledged that Japan’s worsening fiscal health is one reason for the recent gain in yields and said the government will try to eliminate such concern by restraining spending.

“I’m very concerned” about the recent gain in yields, Fujii told reporters in Tokyo today. “Maintaining the trust of investors in the government bond market is our priority.”

Fujii reiterated that the government will try to ensure new bond sales don’t exceed 44 trillion yen in the year starting April 1, the amount initially budgeted for the current period.

Declining tax revenue in the wake of the country’s worst postwar recession may mean debt sales will climb to a record 50 trillion yen this business year, Vice Finance Minister Yoshihiko Noda said last month.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Thomas R. Keene in New York tkeene@bloomberg.net.

Last Updated: November 10, 2009 09:05 EST