By Tetsushi Kajimoto
TOKYO (Reuters) - Japan should keep selling government bonds to the central bank to pay for the cost of reflating the economy out of a pandemic-induced slump, an academic close to new Prime Minister Yoshihide Suga said.
There are "no limits" to what monetary policy can do to achieve higher inflation, at least until the Bank of Japan achieves its elusive 2% inflation target, Kaetsu University Professor Yoichi Takahashi told Reuters in an interview.
A former finance ministry bureaucrat, Takahashi keeps close contact with Suga via mobile phone and email.
He met with the premier at a Tokyo hotel days after Suga was elected to succeed Shinzo Abe, who resigned due to poor health.
The two discussed "economy and other issues," Takahashi said, declining to comment in detail.
"Suga was absolutely right to say he would continue Abenomics," Takahashi said, referring to Abe's reflationary recipe comprised of bold monetary easing, flexible fiscal spending and reform.
Takahashi hailed Suga's intention to proceed with the third arrow of structural reform, which made little headway under Abenomics, and there's room left for the first two arrows, monetary policy easing and fiscal spending.
Takahashi criticised financial institutions for complaining about dwindling profits caused by the central bank's negative interest rate policy.
There are many things regional banks can do such as reviewing business models and streamlining operations before they are forced into realignment, he added.
"Who's complaining about side effects of monetary easing? It's wrong to make such an argument. The BOJ should keep buying government bonds as there's no limit to monetary policy."
The government for its part should not hesitate to boost fiscal spending at a time when the COVID-19 pandemic hit the world's third-largest economy hard, Takahashi said.
When taken together with central bank assets, Japan's debt would become much smaller than official estimates that put it more than twice the size of its $5 trillion economy, the worst among industrial countries.
"It's "misleading to warn Japan is saddled all over with debt. Looking at consolidated base, there's more room for fiscal spending," Takahashi said. "The government should simply issue more bonds and have the BOJ buy them under policy mix."
Analysts polled by Reuters last month forecast the economy would contract by 6% in the current fiscal year to March, more than previously expected.
(Reporting by Tetsushi Kajimoto; Editing by Kim Coghill)