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Linking fiscal policy to inflation, combined with continued BOJ
debt purchases to keep yields low, would help overcome the
limits posed by the zero lower bound on nominal interest rates,
said Sims, a Princeton University economist.
Japan's government should also delay returning to a primary
budget surplus until after the inflation target is met, said
Sims, who is in contact with Koichi Hamada, one of Prime
Minister Shinzo Abe's influential aides on economic policy.
"Fiscal expansion needs to not simply run deficits or increase
spending, it needs to make people realize that at least part of
the debt is going to be paid off by increased inflation," Sims
told Reuters in an interview.
"One way to do that is to make fiscal policy explicitly
contingent on meeting inflation targets."
The views of Sims, visiting Japan to speak about his fiscal
theory of the price level, could be influential because they fit
with the policies Abe is trying to pursue.
Last year, Abe said he wanted to shift priority to
infrastructure spending from fiscal discipline. This makes it
less likely Japan will achieve its self-stated goal of returning
to a primary budget surplus in fiscal 2020.
Abe has already twice delayed a nationwide sales tax hike.
Sims stressed that monetary policy needs to coordinate with
fiscal policy, meaning the BOJ needs to continue its debt
purchases to keep yields low until 2 percent inflation is
achieved.
Once sustained inflation is in sight, the BOJ could revert to
conventional policy to manage it, Sims said.
Sims, who won the Nobel Prize in economics in 2011, argues that
as nominal policy rates approach the zero lower bound,
governments need to increase deficit spending in tandem with
central bank stimulus to generate demand.
Governments also need to convince the public that future debt
will be paid off with inflation and not with higher taxes for
this policy mix to work.
If people think taxes will rise in the future to pay off the
deficit, they have more incentive to buy government debt, which
reduces the amount of money flowing trough the economy,
according to Sims.
(Reporting by Stanley White; Editing by Richard Borsuk)
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