TOKYO Japan should consider lowering its corporate tax rate as a part of its growth strategy to attract more foreign investment, an economic adviser to Prime Minister Shinzo Abe said on Friday.
Koichi Hamada, professor emeritus of economics at Yale University, also said the central bank should loosen monetary policy further if the yen rises further and threatens Japan's economic recovery.
"Japan's growth strategy needs to include steps such as cutting the corporate tax rate, together with deregulation. This needs to happen not only in special economic zones but nationwide," Hamada said in an interview with Reuters on Friday.
On the recent sharp falls in Japanese share prices, Hamada said there was no need to fret as they were a natural correction of excessively bullish bets on Prime Minister Shinzo Abe's bold mix of fiscal and monetary stimulus -- dubbed "Abenomics."
Hamada was appointed as one of Abe's two advisers last December after his Liberal Democratic Party was swept to power by a landslide lower house election victory.
He does not have direct power to influence economic policy but his long-held views on monetary policy as an academic, specifically that the BOJ must pump money more aggressively to beat deflation, has strongly influenced the policies of Abe and the BOJ.
Abe on Wednesday pledged to boost incomes by 3 percent annually and set up special economic zones to attract foreign businesses in the latest tranche of measures, the "Third Arrow" in his "Abenomics" strategy to spur sustainable growth.
But the measures failed to impress markets that had hoped for bolder steps like cutting Japan's corporate tax rate, a move that is advocated by some lawmakers despite resistance within the powerful Ministry of Finance as it would lower tax revenues.
HOPES FOR "ABENOMICS"
Hamada shrugged off the views of some economy watchers that the recent stock market falls reflected reduced hopes of success for Abe's expansionary policy.
He said that it was natural that some investors who harbored excessive expectations should fall by the wayside, before adding: "I don't think the overall market trend has changed."
The economy was in recovery mode, and expectations for Abe's economic policy mix were intact, he said.
The benchmark Nikkei average .N225 fell into bear market territory on Friday from a 5-1/2-year high hit just over half a month ago.
And the yen recovered to as high as 95.55 to the dollar, nearly 8 percent stronger than a 4-1/2 year low hit late last month.
Hamada, one of two official economic advisers to Abe, said the central bank can take action should a spike in the yen make it difficult for Japan to escape deflation.
"The BOJ can adopt more easing measures in that case. It can use more medicines, and I hardly see any problems."
Hamada said he was unalarmed by recent rises in long-term Japanese government bond yields so long as real interest rates were low. The central bank, he said, can diversify the assets it purchases to prevent spikes in nominal interest rates.
In April, the BOJ unleashed the world's most intense burst of stimulus, promising to inject $1.4 trillion into the economy in less than two years to meet its pledge of achieving 2 percent inflation.
The central bank will consider taking further steps next week to curb volatility in the government bond market, sources familiar with BOJ thinking have said, as sudden spikes in yields threaten to undermine the bank's objective to drag the economy out of two decades of deflation [ID:nL3N0EI19M]
Hamada said Japan needs to raise sales tax in the long run, but it would be unwise to do it hastily.
The government plans to double the sales tax to 10 percent by October 2015 in two separate periods. The first hike is scheduled next April, though policymakers will examine the economic situation during the autumn to make a final decision.
"Japan has to push forward fiscal reconstruction and it needs to increase tax revenue in the long run," Hamada said.
The country needs to curb a public debt that is already more than twice the size of its 500 million yen economy.
"Fiscal reconstruction does not just mean raising taxes. The economy should grow before it can safely raise the consumption taxes."
(Additional reporting by Leika Kihara; Editing by Simon Cameron-Moore)