World economy can't afford China-Japan dispute, says Lagarde

International Monetary Fund chief Christine Lagarde has warned China and Japan that the shaky global economy could not afford to have the two nations embroiled in a territorial dispute after Chinese banks withdrew from the fund's annual meeting in Tokyo.

Lagarde sounded the alarm even as Beijing and Tokyo escalated their propaganda war over the control of the Diaoyu Islands, which are known as the Senkakus in Japan. Tokyo vowed to provide an "upfront" response to Beijing's criticism of its attempt to purchase the East China Sea islands.

"Both China and Japan are key economic drivers that do not want to be distracted by territorial division," Lagarde told Japanese media in Washington ahead of the annual meetings of the IMF and the World Bank, to be held in Tokyo next week, Kyodo News reported.

"The current status of the economy and the global economy needs both Japan and China fully engaged," she said.

Financial ties between China and Japan continue to suffer from the territorial dispute, as major Chinese banks, including the "Big Four" state-owned banks, decided not to attend the IMF and World Bank summits next week, even though they had registered representatives for the events.

In another attempt to assert China's claims, three China Marine Surveillance vessels entered waters around the disputed islands again yesterday, the Japanese coastguard said, adding the Chinese vessels ignored warnings to turn back.