Good physics simulation has been used in RPGs before, such as in Might & Magic: Dark Messiah. But I'm surprised those physics simulations have never been tied to character statistics and skills.
For example, as your character becomes stronger, his strikes become visibly more powerful by doing more damage to objects and transferring more momentum to enemies. Wood is splintered faster, metals dented more, enemies knocked back further, weapons and shields shattering, physical stun attacks are more effective, etc. In other words, the number or other value representing the character's strength has a direct effect on the physics calculations.
This could be applied to any number of other influences, of course, such as speed and agility.
And the physical changes can be related to gameplay events other than character stats. Changes could be tied to the environment in the form of astronomical events (the day/night cycle or alignments), for example.
I'd love to see interaction between physics simulation and story events, character development, etc.