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Tomorrow, at 11:50 pm GMT, Japan will release the preliminary results of its first quarter GDP figure. Economists predict that Japan probably expanded 1.4% between January and March. If the forecast holds, it would mark Japan’s fourth consecutive month of growth.

Surprising as this might sound, analysts are pointing to the huge jump in Japan’s trade balance (949.91 billion JPY in March from 649.55 billion JPY in February) and improved consumer spending (6.6% from 5.0%) as the primary causes for Japan’s growth in the first quarter.

Hmm, it looks like we’re going to receive strong GDP numbers from Japan tomorrow. How will market participants react to this report? Or rather, would anyone even care about the report?

With risk aversion back to being the name of the game, it seems that traders could continue buying up the yen regardless of the GDP results. Remember that, during times of risk aversion, money flows back to the yen as traders unwind their riskier holdings and cover their short yen positions.

Then again, even if the actual GDP figure exceeds expectations, the yen’s gains could be limited since the threat of deflation is a much bigger issue in Japan. Along with the GDP release, the preliminary GDP price index will also be reported. This indicator, which measures the change in the price of all goods and services included in the GDP count, is expected to print a 2.9% annualized decline for the first quarter.

Like I mentioned in one of my articles from a long, long time ago, the tricky thing about deflation is that it could eventually lead to a prolonged period of loose credit conditions and asset price bubbles. Of course Japan’s policymakers want to prevent another deflationary spiral from happening again…

Now, what tricks do the BOJ have up their sleeves that they can use to fight deflation?

For one, the central bank has been keeping interest rates at an ultra-low level of 0.10%. For those of you who haven’t been paying attention in class, the BOJ has the lowest interest rates among the major central banks, and it has been this way for the past two years. And guess what? It’s probably gonna stay that way until the middle of 2011!

Secondly, the bank has also expanded its short-term lending program to commercial banks. Last March, the amount set aside for the program was doubled from 10 trillion JPY to 20 trillion JPY! This was done in order to provide more liquidity to credit markets and spur domestic growth. Japan’s new government has mandated that they want to shift Japanese economy from being export-based to a more balanced approach, where domestic spending would take up a larger percentage of their growth.

What concerns the BOJ is that these measures may not be enough to fight off falling prices. Being the ninjas that they are, I’m sure that BOJ officials will still come up with creative ideas to help introduce liquidity. Whether it be further expansion of current programs, or “one-time” injections of emergency cash into the markets or purchasing government bonds, it’ll be interesting to see if BOJ busts out these moves.