Fiscal policy must play key role in supporting Japan economy - ex-BOJ executive

Fiscal policy must play a key role in supporting Japan's economy if overseas risks threaten to derail a fragile recovery, as the central bank has little left in its policy tool kit, a former Bank of Japan executive said.

Kazuo Momma, who retains close contact with current BOJ officials, said it would be best if the central bank refrained from expanding an already massive stimulus for as long as needed, given the rising cost of prolonged easing.

But if the BOJ is forced to address an abrupt yen spike that hurts Japan's export-reliant economy, the only option left would be to push short-term interest rates deeper into negative territory, said Momma, who is now an executive economist at private think tank Mizuho Research Institute.

"If it turns out that the economy needs further support, it ought to come from fiscal policy," Momma said, adding the government still had room to ramp up spending if external shocks cool demand and tips the economy into recession.

"As for monetary policy, the only feasible and possible tool the BOJ has left going forward is to deepen negative rates," he told.

If the BOJ were to ease further, it will likely accompany the move with measures to ease the strain ultra-low rates have placed on financial institutions, Momma said.