IMF managing director talks tough with Beijing. "We would hope," she said, "that longstanding differences concerning territorial matters could be resolved smoothly so that economic co-operation can take over". Tokyo plans a diplomatic gesture as bilateral and the regional economy take a beating.

Tokyo (AsiaNews) - China will "lose out" by not sending its top two finance officials to important global economic meetings in Japan this week, International Monetary Fund (IMF) chief Christine Lagarde said on Thursday, after People's Bank of China Governor Zhou Xiaochuan and Finance Minister Xie Xuren cancelled their visit to the IMF meet in the Japanese capital. Mr Zhou had been due to deliver a lecture on Sunday, the centrepiece of the final day of the annual conference.

Although Chinese authorities have not provided any official reasons for the decision, the dispute between China and Japan over a chain of islands in the East China Sea, known as Diaoyu in China and Senkaku in Japan, is the real reason.

Since August, the two countries have been embroiled in a row over the issue. In China, it has distracted the public from the imminent changed in leadership. In Japan, the issue has helped the government divert the public's attention from its errors in economic and energy matters.

Lagarde called on Beijing and Tokyo-embroiled in a heated dispute over a group of islands in the East China Sea-to settle their differences quickly, adding that "countries in this region are very important for the global economy".

"We have a lot of substantive issues to discuss, great debates, great seminars organised. I think they lose out by not attending the meeting," she said of China's absent finance minister and central bank chief.

The importance of the group of islands is uncertain. Their main attraction is strategic since they are located at the intersection of several maritime routes. Some observers believe they have rich fishing grounds and that their seabed hides huge amounts of natural gas.

During a period of détente in 2008, the two nations signed an agreement to explore and develop the islands jointly, but never saw it through.

The diplomatic row has had a negative impact on Japanese shares, which have declined by 3.1 per cent since 10 September, when Prime Minister Noda announced that Japan would buy the islands from private owners living on Okinawa.

"This is the last thing Japan needs right now, given the overseas slowdown and the sluggish economy," said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former central bank official. "The dispute has become much more serious than we initially expected."

However, the issue directly affects China as well. At stake for China are ties with its second-largest provider of foreign direct investment. Japanese companies poured in .1 billion in the first eight months of 2012, second only to Hong Kong, according to the Chinese Ministry of Commerce.

In addition to a drop in car sales in Japan, Japanese plants in China have had to shut down following violent anti-Japanese demonstrations in that country with scores of unsold cars piling up. Now the authorities in Tokyo are having second thoughts and want to calm things down.

According to Kyodo News, Japan's foremost news agency, Tokyo is considering plans "to compromise a little" with Beijing.

The plans would allow Japan to acknowledge Chinese claims to the disputed islands, whilst "maintaining its position that no official territorial dispute exists over the islet group," sources close to the matter said Tuesday.

Notwithstanding the contradictory nature of the plans, some Chinese analysts see them as a diplomatic gesture for the sake of the economy.

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