June 6 (Bloomberg) -- The European Central Bank’s bid to head off deflation hinges on the take up for the unprecedented cash it’s pumping into the economy, Japanese Finance Minister Taro Aso said.
“The ECB is now working on the problems that plagued us for 10 years,” Aso said in Tokyo today. “Increasing the money supply, the amount of money out in the market, if that goes well, would have somewhat of an effect. It depends on whether there is demand to borrow money from banks in Europe,” he said.
The European Central Bank yesterday cut interest rates to unprecedented lows and President Mario Draghi unveiled steps to boost lending for banks and revive inflation languishing near a quarter of his target. Japan is starting to shake off deflation that has plagued its economy following the burst of its stock and land price bubbles in 1990s, as Prime Minister Shinzo Abe spurs demand with spending and record monetary stimulus.
The ECB became the first major central bank to charge rather than pay banks for parking cash in its coffers, as it battles a deteriorating economic outlook and prolonged period of slow inflation.
It created a targeted 400-billion-euro ($546 billion) loan program to incentivize banks to lend themselves and extended the practice of granting them as much cheap cash as they want until the end of 2016. It also suspended the sterilization of crisis-era bond purchases to raise liquidity in money markets.
While the Bank of Japan spearheaded novel monetary steps in its own fight against deflation, including pushing short-term interest rates to zero in 1999, sluggish demand from businesses for loans crippled the attempts by policy makers to build a sustainable recovery. Abenomics is aimed at reflating the world’s third-biggest economy while supporting demand and boosting the potential for future growth.
“Concerns about deflation, which previously plagued Japan, have now appeared in Europe as well,” Aso said. “It seems as if they are trying to stop it in advance.”
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