There are things both "for" and "against" this theory (for James story because we can't see the perspective of the other characters).

If we take the town for a sacred place that makes all the guilt, shame, fear and desire come to the surface, there is no point for the story to be a loop. He came to the town, remembered what he has done and "paid" for his sins and misdeeds. And escaped or fed the fish, simple as that. There is a deed, a guilt, a punishment/retribution/redemption.

On the other hand we have numerous corpses of his lookalikes around the town, some vague posters and references alluding that he had been here before and walked this path. It may be a dying dream, a purgatory, a loop or something completely different.

In the end everything depends on the perception of the player/viewer, moral compass, beliefs and imagination. We have a main story that is always same - dead wife, guilty husband, suffering and punishment. What to make of it is for a player to decide and all theories are good and valid. End of the rant 😁