In Bizhawk, I ran this script (DW4 Demon Hammer Lua) to test it. I ran the test with Ragnar equipped with the Demon Hammer against a single Rhinoband. The results:
|Ragnar fighting for science.|
So after 10000+ trials it turns out he critical chance for the Demon Hammer in this game is only 33%, which has been a common theme in testing things in Dragon Warrior 4. So far we have found that you have a 33% chance to hit a Metal (Slime/Babble/King) enemy and 33% chance to put any enemy to sleep with a hit from the Sword of Lethargy.
Whether this hit rate is useful or not remains to be seen though. Getting the Demon Hammer early for the Metal Babble grind is a bit risky, as it is located in the middle of the Colossus. And at that point, it would make sense to try to get all the way to the Dire Palace for the return point, and be done with the Colossus before the grind. But getting through at around level 15 though is another matter.
However, the potential to save time with it is still there, equip it onto Ragnar for the Metal Babble grind and then remove the curse afterwards. A downside, however, is that Ragnar will be much less effective against the other random encounters you see in the Royal Crypt while grinding. Getting the Metal Babble Sword for Ragnar still might be the better option here, even with the huge amount of time it takes to pick it up. More testing is needed, as always.