Tension between Japan and China has escalated over the new Japanese leader's suggestion Tokyo could intervene militarily if Beijing attacks Taiwan.

China and Japan are two of Asia’s most powerful nations and the region’s biggest trading partners. Yet centuries of intense rivalry mean their economic embrace can never be taken for granted.

Beijing is flexing its military and economic might to show its displeasure with the Japanese leader’s comments about defending Taiwan. But its aggressive approach risks backfiring.

Conditions are ripe for a strong rally in the 'safe haven' Japanese yen, with a global stock market selloff sparking volatility across asset classes. But the Japanese currency is falling fast, calling into question its long-perceived role as a preferred hiding spot for spooked investors.