Japan's Neighbor Feels Brunt of 'Abenomics'

Prime Minister Shinzo Abe's policies to revive Japan's economy are proving to be problematic for neighboring South Korea, said the head of the country's financial regulator as a weak yen poses a threat to Korea's export competitiveness.

"We have two channels through which 'Abenomics' affects the Korean economy - trade and financial sector," Je-yoon Shin, chairman of South Korea's Financial Services Commission told CNBC Asia's "Squawk Box" on Friday. Exports account for around half of the country's gross domestic product (GDP).

Given both South Korea and Japan economies rely on their export sectors for growth, depreciation in the yen which boosts the latter's export industry, presents a challenge for the former.

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Despite the recent surge the yen has declined 16.6 percent against the U.S. dollar over the past six months driven by aggressive monetary easing in the world's third largest economy, while the won has depreciated just 2.7 percent.

Versus the won, the yen has depreciated around 22 percent over the past 12 months.

"There are many areas competing with Japanese products such as automobiles and ship building - they have [seen] some impact," Shin said.

For example, a weaker yen is making Japanese automakers more competitive and helping them expand their share in key markets such as the Middle East, according to Nomura, which could put South Korean carmakers at a disadvantage.

Small to medium sized businesses in Asia's fourth largest economy are also feeling a pinch, he added.

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Another risk is that Japan's ultra-loose monetary policy encourages more investors to borrow in yen, a low-yielding currency, and invest in South Korean bonds, he said, which could drive the won to appreciate and lead to foreign exchange volatility.

"There [has been] a surge in our capital markets and bond markets - someday outflows of capital [is] another risk," he said, adding that the government is closely monitoring movements in the market.

— By CNBC's Ansuya Harjani