Malaysia's Prime Minister Mahathir Mohamad has said his country may be forced to devalue the ringgit, if the Japanese yen continues to decline in value.

Dr Mahathir said he told Japan's Prime Minister Junichiro Koizumi he was concerned about the impact of the yen's fall on other Asian currencies at their meeting on 10 January.

Malaysia's ringgit has been pegged to at 3.8 to the US dollar since the Asian financial crisis of 1997, but Dr Mahathir said Malaysia may need to "re-think" the peg.

The Japanese yen has dropped more than 10% against the US dollar in the past two months since Japan was officially confirmed in recession.

Piling on pressure

Japan's government has done little to halt the yen's slide to 39-month lows, and is thought to favour a weaker currency to support exports, analysts say.

Mr Koizumi "did not really give an assurance but he indicated, of course, that they will try to ensure the yen doesn't depreciate any more," the Malaysian prime minister said.

Dr Mahathir said a yen exchange rate of 140 to the dollar could trigger devaluation in Malaysia - a level Japan's former top financial diplomat has said could be breached by the end of March.

Dr Mahathir said he was particularly concerned about the prospect of China, a giant manufacturer of cheap goods which competes with south-east Asian exporters, devaluing its currency under pressure from a sliding yen.

China fears

"I'm worried because it may cause China to devalue, and if China devalues then of course it will force us to rethink about our ringgit peg".

The yen's fall helps Japanese goods to undercut Malaysia's high tech goods in the US and Europe.

China is a competitor in other manufactured goods and basic commodities.

It's currency, the yuan, is not generally convertible but for trade purposes it is exchanged at between 8.2770 to 8.2800 to the dollar.

Lower yen forecast

The yen hit a fresh low of 133.37 to the dollar on Wednesday but has since recovered slightly.

It was trading at 132.35 to the dollar at 0745 GMT on Friday.

Eisuke Sakakibara, ex-Vice Minister for International Affairs at the Japanese Finance Ministry, said on Thursday he expects the yen to dive to 140 to the dollar by the end of March because Japan's "economic fundamentals are extremely weak now".