Lagarde: China, Japan 'too important' for row

The shaky global economy needs Japan and China to be fully engaged, the head of the IMF said, warning the world could not afford to have the two countries distracted by their bitter territorial dispute. The warning came as the Asian Development Bank (ADB) slashed its growth estimates for the continent, saying the days of double-digit expansion were over. Speaking to Japanese media ahead of the annual IMF meeting in Tokyo next week, Christine Lagarde said two of the world's biggest economies needed to show a bit of neighbourly tolerance for the good of everybody. "Both China and Japan are key economic drivers that do not want to be distracted by territorial division," Kyodo News agency quoted Lagarde as telling reporters in Washington, in an interview published Wednesday. "The current status of the economy and the global economy needs both Japan and China fully engaged," she said. Meanwhile the ADB cautioned Wednesday that developing Asia was seeing a slowdown in its previously blistering growth. The bank said China's gross domestic product (GDP) would expand just 7.7 percent this year, well below the 9.3 percent achieved last year. Fellow regional standout India would see GDP growth cut to 5.6 percent. "Developing Asia is slowing down much more than we expected," ADB chief economist Changyong Rhee told reporters in Hong Kong. "The years of two-digit growth in Asia are coming to an end," he said. China and Japan, the world's second and third largest economies, have been at loggerheads for months over a group of uninhabited islands in the East China Sea. Tokyo administers the chain under the name Senkakus, but they are claimed by Beijing, which calls them the Diaoyus. Chinese government ships regularly venture into waters around the islands, routinely ignoring orders to leave from Japanese coastguard vessels. Three vessels were in the area on Wednesday. Increasingly vitriolic diplomatic exchanges, including at the United Nations in New York last week, and mass anti-Japanese protests in several Chinese cities have further unsettled the already fractious relationship. Japanese firms operating in China were forced to shutter or scale back their operations when mobs attacked factories and shops. Some companies also complained of tightened customs inspections and difficulties obtaining visas for their foreign staff. Lagarde said neighbouring countries must display "a certain degree of tolerance" if they were to rub along effectively. The IMF managing director was speaking ahead of her trip to Japan next week when Tokyo hosts meetings of the IMF and the World Bank, in what will be the world's largest single gathering of finance officials, bankers and non-government organisations. Dow Jones Newswires reported late Tuesday several big Chinese banks had cancelled their participation in events connected to the meetings, in what it said was a sign of the row spreading into the broader economic realm. Most of the banks have not given a reason for their last-minute pullouts but one unidentified person was explicit. "Quite frankly, it's Japan-China relations," Dow Jones quoted an official at the Tokyo branch of the Agricultural Bank of China as saying. The bank will withdraw from both IMF-related events and another financial industry conference planned in the western Japanese city of Osaka at the end of October. The global economy has struggled to shrug off the effects of the sovereign debt crisis in Europe, slowing growth in China and lingering concerns over the faltering US economic recovery. Lagarde said European countries "have made huge progress" already on the road to recovery but "more needs to be done", according to Kyodo. She said the "fiscal cliff" in the United States -- the anticipated termination of income tax cuts and a massive spending reduction in early 2013 -- also poses a threat to the global recovery. "My dearest objective is that the countries participating in the IMF annual meeting in Tokyo would be prepared to come together, act together and try to go beyond the crisis to sustain the recovery," she was quoted as saying.