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SEOUL, Jan 2 (Reuters) - South Korea's government may be more tolerant than previous administrations to surges in the won currency against the faltering yen, with a soaring current account surplus providing some cushion for the economy even as its financial markets and exporters start to feel the pressure.
Finance Minister Hyun Oh-seok made relatively lukewarm comments on the currency on Thursday while the won's spike combined with concerns over disappointing manufacturing data from China to send local share prices down more than 2 percent and prompted foreign investors to sell bonds.
Traders said the authorities were believed to have bought dollars to tame the won's rise but the intervention fell far short of stopping the won from ending the first domestic session of the year up 0.5 percent against the dollar.
The won briefly touched its strongest levels in more than five years both against the dollar and yen on Thursday.
"They have already been tolerant," said Frances Cheung, senior strategist at Credit Agricole CIB in Hong Kong, referring to the 10-month-old government of President Park Geun-hye.
"The current account surplus is the fundamental support for the won."
The government expects Asia's fourth-largest economy to post a record current account surplus of about $70 billion for 2013 on resilient exports against depressed imports. It would be equivalent to some 6 percent of annual gross domestic product, one of the biggest among emerging economies.
South Korean exports grew more than expected in December, pointing to the economy sustaining momentum into the new year, though there are increasing concerns among investors about the competitive impact of prolonged weakness in the yen.
Auto makers Hyundai Motor Co and Kia Motors Corp are bracing for their most sluggish growth in annual sales since 2003 as the retreating yen fuels exports from Japanese rivals.
The stock market's benchmark KOSPI index dived 2.2 percent, its worst single-day loss in almost 18 months, as investors dumped export-dependent heavyweights such as Samsung Electronics and Hyundai Motor. Samsung tumbled 4.6 percent, while Hyundai and Kia dived 5.1 percent and 6.1 percent, respectively.
Earlier this week, senior officials from both South Korea and China expressed alarm over the sharp slide in the yen, which has plunged some 26 percent against the dollar over the past 15 months.
Still, both countries appear to understand the need for Tokyo to revive its $5 trillion economy, and the near-term impact that aggressive policy easing will have on its currency.
"The U.S. is reducing its quantitative easing while Japan is strengthening its own programme, so the yen's depreciation is inevitable," Minister Hyun told reporters at the ministry building in the southern administrative city of Sejong.
Another senior ministry official added the ministry could intervene in the market should the won move too rapidly, but the comment failed to turn the course for the robust won.
In December, foreigners sold a net 1.82 trillion won ($1.72 billion) worth of South Korean shares on the main exchange but their net purchases of bonds were bigger at 2.87 trillion won, preliminary data from the Financial Supervisory Service shows.
South Korean bonds fell sharply on Thursday, with the yield on benchmark 10-year treasury bonds recording the biggest daily rise in nearly six months as foreign outflows triggered profit-taking.
"Foreigners were overly aggressive in buying bond futures recently, and prices fell sharply today as the inevitable sell orders emerged on the year's first day of trade," a bond dealer said.
As the chair for the Group of 20 economies' events in 2010, South Korea had supported a call for nations to keep current account surpluses at a manageable level and is now worried about possible diplomatic pressure as its own surplus has risen sharply.
To be sure, while a stronger won would weaken the pricing power of Korean manufacturers in overseas markets and cut profits from sales made in dollars when converted into won, the impact on the overall economy has recently been played down.
Big manufacturers such as Hyundai and Samsung have been slow to increase employment and investment within the country even when they enjoyed sizeable profits because they have expanded production abroad to save on production and delivery costs.
"We do not think further weakness in the yen/won would have a significant impact on Korea's export competitiveness in 2014," Christiaan Tuntono, an analyst at Credit Suisse in Hong Kong, said in a research note, adding the correlation between the exchange rate and exports from the two countries was low.
South Korea's economy has long been dependent on exports since Park's father, late President Park Chung-hee, launched an ambitious industrialisation drive in the early 1960s with a dream of pulling the war-torn country out of poverty.
President Park Geun-hye has declared it was time to rethink the decades-old policy and has pledged on several occasions her government would shift policy away from supporting export industries toward expanding the domestic service sector.
Exports accounted for a record 56.5 percent of annual GDP in 2012, compared with just 33.1 percent 10 years ago, but job creation by the manufacturing industry has been slowing. (Additional reporting by Jongwoo Cheon, Se Young Lee, Lee Shin-hyung and Hyunjoo Jin; Editing by Kim Coghill)