Two of nine policy board members at the Bank of Japan proposed cutting the 30-35 trln yen liquidity target for banks, at the mid-July policy meeting according to minutes of the meeting released today. The proposal was rejected by a majority vote with the board deciding to maintain the target range in order to help the Japanese economy overcome its prolonged bout of deflation. At the July 12-13 policy board meeting, Katsutoshi Fukuma proposed cutting the outstanding balance of current account deposits held at the Bank of Japan from "around 30 to 35 trln yen" to "around 27 to 32 trln yen," the minutes showed. This suggestion was rejected by a vote of nine-to-one. Atsushi Mizuno offered a sharper reduction in the reserve level to 25-30 trln yen which was also defeated by the same margin. Both Mizuno and Fukuma dissented from the board's decision to maintain the reserve target level at 30-35 trln yen with Mizuno warning that if the monetary authority "did not start normalizing its conduct of monetary policy at an early stage, including shortening the maturities of funds-supplying operations, interest rate risks might increase in the future." Similary, Fukuma was alarmed by the future risk of sharp spikes in interest rates, saying there was "a possibility that maintaining a huge outstanding balance of current accounts at the bank would hinder the process of restoring the proper functioning of the market and cause an erosion in financial market discipline, thereby increasing interest rate risk in the future." Representatives from the Ministry of Finance and the Cabinet Office have pressed the policy board members hard to maintain the quantitative monetary easing framework, citing downside risks to the economy stemming from surging crude oil prices and prolonged IT inventory adjustments. Bank of Japan governor Toshihiko Fukui has repeatedly stressed that the BoJ would not start cutting its reserve target levels aggressively, until Japan fully overcomes deflation. The governor, however, has said the central bank will be "open" to any changes in trends in the money market and the need for funds among financial institutions, suggesting that it could reduce the target level, should its money market operations continue to fail. The release today of the April-June quarter real GDP data confirmed that Japan is still undergoing a mild period of deflation, as the GDP deflator, which measures the degree of deflation, was put at minus 0.8 pct, compared to minus 1.0 pct in the prior January-March quarter.