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The yen’s vulnerability raises the specter of a new currency war in Asia

As the yen hits new lows, some investors are pondering an almost unthinkable scenario in a region busy reinforcing falling exchange rates: a series of competitive devaluations sparking a new Asian currency war.

It is already believed that the likely intervention to lift the yen from a 34-year low against the dollar will not have a lasting effect if Japan goes ahead alone, raising the prospect of a new period of weakness for the beleaguered currency . That could bring competitive tensions with exporting neighbors South Korea and Taiwan to a head – and increase pressure on China, where talk of the potential for a yuan devaluation is already growing.

A destabilizing decline in the yen could be the trigger that forces Japan’s neighbors into extreme action, the theory goes, even though their efforts so far have been to support currencies rather than capitulate and let them slide. While it is a minority view, and not one that points to a repeat of the Asian financial crisis, it is gaining some traction in a scenario where a resurgent dollar remains stronger for longer.

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