Japan's drive to weaken the yen poses a threat to big South Korean exporters such as Hyundai Motor, but the new government in Seoul may not want to do too much about it - a firming won could actually make the economy stronger.
The yen tumbled by some 10 percent against the dollar in the December quarter as the won was rising, depressing the shares of big Korean exporters, a swing in the exchange rate that traditionally set off alarm bells in Seoul over worries about the potential impact on sales to the rest of the world.
However, Korean officials have signaled a new willingness to tolerate a higher won, partly to reflect a record current account surplus but also to help the economy shift away from a reliance on exports.
President-elect Park Geun-hye, who takes office late next month, has said Korea's export-led economic model was now outdated. Exporters no longer provide sufficient jobs, so she will focus on building up domestic industries.
(Read More: How South Korea Became a Consumer Product Juggernaut)
South Korean voters also seem to have shifted. Government-funded television network KBS found earlier this month that the public ranked low inflation and economic stability as the most important economic issues in an opinion poll, compared with a push for growth, which was top of the list in a similar poll after the last presidential election five years ago.
Many voters now see a cheap won as an effective subsidy for major exporters, like Hyundai Motor and Samsung, which at the same time hurts their own purchasing power.
"A gradually strengthening currency has many benefits," said Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong.
"For one, it boosts the purchasing power of households," he said. "It also helps to raise pressure on the manufacturing sector to improve productivity."
Exporters to be Hit
"Abenomics", the name given to a drive by new Japanese Prime Minister Shinzo Abe to weaken the yen through monetary stimulus, could deal an especially strong blow to South Korean automakers, who compete head on with Japanese rivals around the world.
The yen fell to a two-and-a-half year low against the dollar on Monday, while the won rose last week to its highest level against the dollar since August 2011.
Japan's Toyota Motor can now in principle offer a discount of more than 10 percent to its U.S. customers without losing profit, whereas South Korea's Hyundai Motor has to raise its dollar price by over 5 percent to keep up with the won.
"The strengthening won is a sensitive factor in our earnings," said one executive at Hyundai Motor Group, which includes affiliate Kia Motors. "We are agonizing over the firming won."
A December report by the Korea Automotive Research Institute (KARI), which is affiliated with the Hyundai Motor Group, showed South Korean auto exports shrinking by 1.2 percent annually for every 1 percent drop in the yen against the won.
South Korea has risen to become an industrial powerhouse in less than two generations from the ruins of war by following in Japan's footsteps, partly by using a cheap currency to gain a toehold in manufactured exports until it could move up the ladder of quality and technology.
(Read More: South Korea Manufacturing Up for First time in 7 Months)
The won fell nearly 80 percent against the yen in real terms over the 30 years to early 2000, Thomson Reuters Datastream data shows.
More Decent Jobs
Park, elected in December, has said she aims to expand domestic sectors and smaller industries. She has called on the country's conglomerates to think twice about making layoffs.
"I believe that the management goal of conglomerates should not remain maximizing profit but should involve pursuing coexistence with the larger community," she said after her election win.
Details of her policies are due to be unveiled next month, but her remarks so far have indicated smaller companies would be given easier access to financial and regulatory support.
One member of her party's Supreme Council, a leadership group, told Reuters in early December that foreign exchange policy should no longer be geared to helping exporters.
"When it comes to a change in the foreign exchange rate, there are always gainers and losers," Lee Hye-hoon, a member of Park's Saenuri Party, said. "I am opposed to a policy of keeping the (dollar/won) exchange rate high to support the exports and some large companies as that would increase the cost of living of the general public."
Moreover, manufacturers do not create as many jobs domestically as before, a result of more automation and moving assembly lines to cheaper locations overseas.
Central bank data shows the share of workers hired by the manufacturing sector has fallen steadily to 18 percent of non-farm payrolls by 2011 from more than 20 percent in 2004 even as the sector's share of gross domestic product rose.
For Normalizing Won, Speed Matters
Despite their important role in employment, South Korea's service industries have lagged far behind manufacturing in labor productivity as the government focused on overseas markets to the extent that exports totaled 57 percent of GDP in the first three quarters of last year, compared with 43 percent for all of 2007.
Although Abe's monetary easing mission sparked the yen's recent dive, its decline and the won's climb could also be a realignment as financial risks eases globally.
"The won is still seen as broadly undervalued and the recent moves represent normalization," said Young Sun Kwon, economist at Nomura International in Hong Kong.
Still, policymakers in Seoul are worried that too fast a rise in the won, or increased volatility in foreign exchange rates, would hurt not only exporters and importers but the country's financial stability.
"What worries us most is that the appreciation could become a self-fulfilling prophecy and then short-term foreign debt could rise as a result of speculative bets," a senior foreign exchange official said.