Japan's cabinet approved a plan to remove the neighbouring country from a list of countries that enjoy minimum export controls, escalating bilateral dispute over compensation for wartime forced labourers.

The decision would take effect from Aug. 28, Industry Minister Hiroshige Seko told a briefing.

"Investor sentiment would be inevitably dampened due to Japan's measure, which put more negative factors in addition to Trump's tariff threat," Han Dae-hoon, an analyst at SK Securities said in a note.

As of 0414 GMT, the Seoul stock market's main KOSPI was down 18.66 points or 0.92% at 1,998.68 points.

"The negative factors led by Japan had already dented South Korean stocks in July, so I expect the influence of the latest decision to be limited," said Seo Sang-young, an analyst at Kiwoom Securities.

"It will affect some small- and mid-sized manufacturers, which import precision machineries from Japan, as the decision is expected to complicate import process," Seo added.

The benchmark index lost as much as 1.5% in early trade, hitting its lowest since early January, but later recouped some of the early losses. On a weekly basis, the KOSPI is set to contract more than 3%, poised for its second straight weekly decline.

Foreigners were net sellers of 189.6 billion won ($158.57 million) worth of shares on the main board on Friday. Stationery-maker Monami Co Ltd  jumped more than 11%, while apparel makers Shinsung Tongsang Co Ltd and Sbw Inc added more than 3% each, as investors expected their sales to grow as buyers stay away from Japanese goods.

As worries over global supply chain prompted demand for safe-haven bets, the South Korean won marked its lowest against the Japanese yen since November 2016. The currency also matched its lowest level versus the U.S. dollar since January 2017.

The won was quoted at 1,195.5 per dollar on the onshore settlement platform, 0.59% lower than its previous close at 1,188.5.

Meanwhile, U.S. President Donald Trump on Thursday said he plans to impose a 10% tariff on $300 billion of Chinese imports from next month and could raise tariffs further if China's President Xi Jinping fails to move more quickly to strike a trade deal. Trump's remarks pushed U.S. stocks lower.

The KOSPI has dropped 2.07% so far this year, and lost 5.3% in the previous 30 trading sessions. The trading volume during the session in the KOSPI index was 214.76 million shares and, of the total traded issues of 887, the number of advancing shares was 151.

The won has lost 6.7% against the U.S dollar so far this year, posting biggest losses among Asian currencies.

In money and debt markets, the benchmark 10-year bond yield hit an all-time low of 1.325%. September futures on three-year treasury bonds rose 0.20 points to 111.00, while the 3-month Certificate of Deposit rate was quoted at 1.50%.

The most liquid 3-year Korean treasury bond yield fell by 6.0 basis points to 1.249%.