Sliding Yen Could Herald New Asian Currency Crisis: Albert Edwards

A businessman passes before a share prices board in Tokyo.
Yoshikazu Tsuno | AFP | Getty Images
A businessman passes before a share prices board in Tokyo.

The falling yen coupled with a fall-off in Chinese investment inflows "increasingly resembles" the run-up to the 1997 currency crisis, said Albert Edwards, Societe Generale's ultra-bearish strategist.

"It seems investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia's subsequent economic collapse," Edwards wrote in a global strategy note on Wednesday.

Edwards, who recently returned from meeting clients in Hong Kong and Singapore, forecast the Bank of Japan will lose control of its recently launched program of aggressive monetary easing, leading to spiraling inflation and an increasingly unsustainable debt position.

(Read More: Bank of Japan Unveils Aggressive Monetary Policy)

"If the market really believes the Bank of Japan is committed to the 2 percent inflation target (and I certainly do), then Japanese bond yields will quickly attempt a move above 2 percent," he said.

"If the Japanese government bond yield begins to rise, then an unsustainable debt position becomes even more obviously unsustainable and the government will be obliged to ramp up its quantitative easing operations to pin yields at low levels."

"I certainly expect accelerating quantitative easing to undermine the yen further, and the market to anticipate this," he added.

Edwards warned investors they should expect money to pour out of Japan in the same way it did after the BoJ's foreign exchange intervention in 2004.

"Who will be a beneficiary of this carry trade? Probably high yield GIIPS [Greece, Italy, Ireland, Portugal and Spain] bond yields and the euro. And hence the periphery will appear to have been 'fixed'. Who will suffer? Germany, as the euro soars," he said

(Read More: Audacious BOJ Policy Sends Dollar, Euro Soaring)

A weak yen combined with deteriorating balance of payments situations in China and other major emerging markets is reminiscent of the mid-1990s, said Edwards.

"When I see a sharp rise in China' s real exchange rate and deteriorating Balance of Payment, it rings alarm bells. China is not the most vulnerable of the emerging markets currencies to a weak yen, but this conjunction could easily trigger a currency crisis as growth is crushed. High levels of foreign exchange reserves are no protection," Edwards added.