Abe's adviser says Japan needs 4 percent growth for sales tax hike

By Kaori Kaneko and Sumio Ito

TOKYO (Reuters) - Japan should wait for its economy to show two more quarters of annualized 4 percent growth before committing to raising the sales tax as planned next year, otherwise the benefits of the government's reflationary strategy could be lost, a key adviser of Prime Minister Shinzo Abe told Reuters on Tuesday.

Koichi Hamada, professor emeritus of economics at Yale University, is among a handful of Abe's aides who are opposed to a tax hike set for April next year.

The current plan, backed by Finance Minister Taro Aso, is to increase the sales tax from 5 percent to 8 percent next April, and raise it to 10 percent in 2015, but Abe has said a decision would be taken in the autumn over whether to go ahead as planned.

Hamada, one of Abe's two economic advisers, advocated raising the sales tax more gradually, such as by one percentage point annually for several years, to soften the blow for the economy.

"If there are prospects that Japan's annualized GDP growth will likely continue to stay around 4 percent in the next two quarters, I think the nation can raise the sales tax as planned," Hamada said in a phone interview on Tuesday.

Hamada went on to voice doubts whether that could be achieved.

"I am not sure that would happen because the economy will soon follow a potential growth path," he said, referring to a growth rate typically taken to mean the level that could be achieved as the economy nears optimum levels of employment and inflation.

Japan's economy posted annualized growth of 4.1 percent in January-March, and second quarter data is due to be released on August 2.

Hamada said Japan should wait also for the jobless rate to fall to 3 percent, from around 4 percent currently, before raising the sales tax.

Finance Minister Aso, also speaking on Tuesday, said the sales tax hike must go ahead next year to demonstrate a commitment to fixing the government's sorry finances.

Aso said the government is ready to compile an extra budget for fiscal spending to ease the pain from the sales tax hike on the economy.

The previous government had pushed through the plans last year to raise the sales tax in a bid to tackle Japan's enormous public debt, which at $5 trillion is well over twice the gross domestic product and is the largest in the industrial world.

Abe has been silent over whether he will proceed with the tax hike as planned, and has only said that a decision will be made in the autumn after looking at various economic data.

While Hamada is not directly involved in policy-making, he has close contacts with Abe, who became prime minister when the ruling bloc won power in the lower house of parliament. On Sunday, Abe's ruling bloc won power in the upper house too.

Hamada's reflationary views have had strong influence on the prime minister, who aims to haul the world's third largest economy out of a deflationary cycle that has lasted 15 years.

The strategy of aggressive monetary easing alongside heavy government spending has been dubbed "Abenomics".

"There is a chance that benefits from 'Abenomics' may be much reduced if Japan carries out sales tax hikes as planned," said Hamada.

"If Japan prioritizes public finance reform over the economic recovery, the public will suffer a significant shock," Hamada said, arguing that a more gradual approach would be more helpful to economic growth and government revenues.

(Additional reporting by Leika Kihara, Editing by Simon Cameron-Moore)