The unprecedented surge of the South Korean won against the yen could put a substantial dent in exports for Asia's fourth largest economy, a report from the South Korean Hyundai Research Institute has shown.
According to the report, the value of Korea's total exports will decline by 0.92 percent when the yen-won exchange rate falls by one percent.
"This means Korea's exports can be reduced by six percent or more if the yen-won rate falls by 7 percent, which is the annual average expectation level of yen-dollar change of the Japanese government," read the report published on Sunday.
South Korea relies heavily on exports to fuel its economic growth. In 2011, exports contributed to 32 percent of South Korea's GDP, according to South Korea trade statistics.
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On Monday the won traded at its strongest level against the yen since early 2010, at 11.69 won to one yen, and has gained 18 percent versus the Japanese currency over the past three months, as expectations of aggressive Japanese monetary policy have weakened the yen against all major currencies.
Now over half of South Korean listed companies have missed expectations for their fourth-quarter earnings, demonstrating the strength of the won is taking its toll.
Currency analysts say the won has the scope to appreciate further, putting further pressure on exports.
"This has become a bigger concern since the beginning of October, when cross-rates surged by 23 percent. There is still momentum within the won, and technically it could go a lot further. In addition, the sensitivity of the KRW to JPY movements has increased over recent weeks," said Mitul Kotecha, head of global currency research at French investment bank Credit Agricole.
"Capital inflows into Korean bond and equity markets will be a key factor driving the won stronger over coming months," he added.
Richard Yetsenga, head of global currency research at ANZ bank, also sees further upside: "We think it will continue to appreciate," he said.
However, Shaun Cochran, head of Korea research at independent brokerage CLSA, warned the market is "hyperventilating" over the risks of the won's appreciation, due to the scale of its move.
He did not see further upside in the won's value on a 12 month view, and said this makes a tactical snap back of the cross rate in favor of the Koreans, and a risk for the yen bears.
A similar report by Credit Suisse also found that a weaker yen will impact Korea's export competitiveness in comparison to Japan. The report, titled Japan's Reflation: Winners and Loser in Non-Japan Asia, found Korean real export growth will underperform Japan's by 1.1 percent as a result of a 1 percent depreciation in yen-won, in three to six months.
(Read More: South Korea Growth Hits Three- Year Low)
However, the author of the report said the recovery in global growth and Korean exporters' price adjustments would offset some of this negative impact.
The alarming pace of the won's appreciation could prompt South Korea's government to take measures to control volatility. The country had a tough 2012 when growth slipped to 2 percent last year, its second worst year in 14 years, and down from 3.6 percent in 2011, leading the country's national bank to cut interest rates twice in 2012 in an attempt to revive growth. Last week, reports emerged that the South Korean government was mulling imposing tighter controls on trading in an attempt to calm volatility in the currency market, through a financial transaction tax.
"Given the pace of the move, we might see a more aggressive stance from Korea to cap this move," said Credit Agricole's Kotecha.
ANZ's Yetsenga agreed and said further strength in the won could trigger a move from government officials.
"It is feasible that further strength in the won could press on the Korean government to take steps to keep its domestic house in order," he said.