Yes, magical items will lose their power. However, the book could still be used as a weapon for Black Mage and other Jobs with a focus on magic, and enhance the might of spells (like weapons in traditional RPGs). Likewise, the sword could be used as a particularly powerful sword with a wind element, for example. Furthermore, the full potential of the weapon could be unlocked during the limit break period, should the limit break focus on the weapon's power.

App'ing characters from canon who were never officially translated in English is fine and yes, hydrokinetic abilities would be nulled as well.

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