Yes , you can point it at the iTunes folder, but you cant load 700GB into Jaikoz you would have to do it in batches. Jaikoz by default uses 800mb and can safetly load 10,000 songs (being cautious) but if you have spare memory and configure Jaikoz to use more memory (see manual) then you can load more, I have customers loading 200,000 files.
In Jaikoz you can configure it to update iTunes as songs are changed in Jaikoz (Preferences:Save:iTunes Autoupdate), and on OSX this is enabled by default. If it works correctly iTunes will reconise chnages made, causing it to update its internal database and also the xml file which is base don the internal database, but occasionally it doesnt work before Apple keep changing things in iTunes.
If it is not working you can synchronize changes made externally with iTunes by simply selecting all your files in iTunes and selecting GetInfo as long as you Dont rename your files , that can cause problems.
Best to try it out on a small test set.