The balance of power now rests with Japan, according to the bank, as Japan's policy-makers' more dovish approach looks set to bring the world a step closer to a currency war.

The Bank of Japan doubled its inflation target to 2 percent in January and made an open-ended commitment to continue buying assets from next year. This follows a leadership change, with new Prime Minister Shinzo Abe openly calling for aggressive monetary stimulus from the country's central bank.

(Read More: Land of the Falling Yen: Japan Cheers Sliding Currency)

This move, Morgan Stanley said, is a "game changer" as Japan tries to invigorate its stagnating economy .