World Bank's Indrawati urges end to China-Japan row

World Bank Managing Director Sri Mulyani Indrawati smiles during an interview with Reuters at the Annual Meetings of the International Monetary Fund and the World Bank Group in Tokyo October 11, 2012.

TOKYO (Reuters) - The global stakes are too high for the territorial row between China and Japan to be allowed to escalate, World Bank Managing Director Sri Mulyani Indrawati said on Thursday, calling on their leaders to resolve the dispute.

Relations between China and Japan are at their worst in years over competing claims to sovereignty over islands in the East China Sea. The dispute stoked violent protests and calls for boycotts of Japanese products in China last month.

Chinese finance officials, including central bank governor Zhou Xiaochuan, pulled out of this week's IMF and World Bank meetings in Tokyo, in what analysts said was a deliberate move to embarrass Japan on the international stage.

Indrawati, a former Indonesian finance minister, told Reuters in an interview the row was not likely to dampen the mood of the Tokyo meetings, but came at a time when the world economy was already reeling from uncertainty over the euro zone crisis.

She said Japan's and China's leaders had a responsibility to resolve the dispute so that it did not cause unnecessary economic and social damages.

"The relationship between China and Japan is just too important not only for these two countries," Indrawati told Reuters.

"We all know that China and Japan are the second and third largest economy in the world, so anything that happens between the two countries is not only affecting the two sides, but also affecting the region as well as globally."

"The stake is just too high," she said, adding: "We already have a lot of uncertainty coming from the global (economic) weakening so it is in the mutual benefit of the two countries to settle this dispute in an ... acceptable way."

Japanese car makers have reported tumbling sales in China for September, with Toyota's almost halving, confirming the impact of the territorial row.

She said the IMF-World Bank meetings was an opportunity for global finance leaders to explore policies that could limit the impact of the euro zone crisis on emerging and developing economies, that are now clearly slowing.

"Policymakers have to think about whether they should respond to the short-term turbulence or should they focus more on the medium-term," she said.

Indrawati said the crisis could reverse the reduction of poverty in developing countries over the past 10 years. The World Bank estimated in 2009 that the financial crisis had pushed more than 53 million people into poverty.

"We do understand that this can be easily erased when the economy both in developed and emerging countries suffers from a setback," she added.

Fans of Indrawati in Indonesia last year formed a political party for her in the hope that she may decide to run for president in 2014.

Asked whether she was interested in running for president, Indrawati said: "It is always an honour and for me people asking that kind of question (implies) there is an expectation, or at least recognition, about the role I can play.

"But the work at the Bank is so challenging, especially at this time when many different countries are facing a lot of risk coming from both global challenges as well as their own domestic challenges, this is a very demanding time to focus on that issue."

(Reporting by Lesley Wroughton; editing by Andrew Roche)