Abe adviser: Abenomics working well, best if yen weakens to 120 against US dollar

Japan's Prime Minister and leader of the ruling Liberal Democratic Party (LDP) Shinzo Abe (centre, right) raises his fist in the air to shout with his party's lawmakers as they open an election campaign office at the LDP headquarters in Tokyo on Nov
Japan's Prime Minister and leader of the ruling Liberal Democratic Party (LDP) Shinzo Abe (centre, right) raises his fist in the air to shout with his party's lawmakers as they open an election campaign office at the LDP headquarters in Tokyo on Nov 21, 2014. Prime Minister Shinzo Abe's economic policies are working well but the blow to the economy from an April sales tax hike has been bigger than expected, one of Abe's key advisers said on Friday. -- PHOTO: AFP

TOKYO (Reuters) - Prime Minister Shinzo Abe's economic policies are working well but the blow to the economy from an April sales tax hike has been bigger than expected, one of Abe's key advisers said on Friday.

Koichi Hamada, professor emeritus of economics at Yale University, also said Japan's overall economy will benefit if the yen weakens to 120 yen against the dollar but added that steps are needed to reduce any negative impact on consumers.

Abe dissolved parliament's lower house on Friday for a snap election expected on Dec. 14, seeking a fresh mandate for his struggling "Abenomics" revival strategy just two years after he returned to power promising that "Japan is Back".

"It is true the economy is faltering because of the sales tax hike to 8 percent in April," Hamada told Reuters in an interview.

He said Abenomics' first arrow of monetary policy and the second arrow of fiscal spending to generate demand have been working pretty well. "The negative impact from the tax hike, which works in the opposite direction to Abenomics, has been a little stronger than expected. In that sense, it is natural for the government to postpone the (second) tax hike."

A second tax hike, to 10 percent, had been slated for Oct 2015, but Abe said this week he would postpone the move for 18 months after data showed the economy had unexpectedly slipped back into recession.

Asked if the yen weakening to 120 yen per dollar would be positive for the overall economy, Hamada said: "Yes, I think so." But he added the government may have to offer assistance to cushion the blow on those most vulnerable to rising prices.

"An increase in import costs stemming from yen's weakness will weigh on low-income earners, who suffer the most due to the tax hike. It is possible to consider measures for them to alleviate damages from the weak yen such as supplementary benefits to lower-income households."

The yen rose sharply against the dollar on Friday after Japanese Finance Minister Taro Aso said the currency's fall over the past week was too rapid, in one of the strongest warnings against a weak yen since Japan started its aggressive monetary stimulus two years ago.

The yen stood around 117.80 yen against the dollar on Friday, after having fallen to seven-year low around 119 yen.

The Bank of Japan shocked global financial markets late last month by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after April sales tax hike.