* China central bank tolerates rise in yuan to 21-month high
* Yuan daily reference rate set at same level as on Friday
* China pressed to end dollar peg ahead of G20 meeting
* MOF's Ikeda says closely watching yuan impact on Japan (Adds deputy finmin comments in paras 10-11)
By Tetsushi Kajimoto
TOKYO, June 21 (Reuters) - Japan's finance minister welcomed Beijing's announcement that it will allow more flexibility in the yuan currency, saying the move will benefit both China and the world economy.
"I expect it to be a plus for the China and Asia economies as well as the world economy. Basically I welcome it," Yoshihiko Noda told reporters at the ministry on Monday.
The People's Bank of China announced on Saturday that it would resume making the yuan more flexible, signalling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.
But on Sunday it ruled out a one-off move, said there was no basis for any big appreciation and added it will keep the exchange rate at a basically stable level.
Global markets celebrated on Monday at the merest hint that China would let its currency appreciate, showing just how badly China is needed to drive a recovery in the sagging world economy.
However, they gave back some gains after the Chinese central bank set its daily reference rate on Monday at 6.8275 per dollar, unchanged from its reference point on Friday -- the day before it promised to allow the yuan to trade more flexibly.
Spot yuan hit its highest close since the currency's July 2005 revaluation.
The yuan is allowed to trade 0.5 percent either side of the reference point against the dollar, so is an important marker for trading sentiment.
The announcement was made as the Group of 20 nations prepares to meet in Canada this weekend to hash out a course for the future as the world gradually emerges from the worst financial crisis since the Great Depression.
"I agree with the view that China has taken this step just in time for the G20 meeting," Japan's deputy finance minister Motohisa Ikeda told reporters.
"There was no change (in the yuan rate) today, but I will closely watch how (yuan reform) will affect the Japanese economy as it could have a big impact on world economy."
Bank of Japan Governor Masaaki Shirakawa met with Prime Minister Naoto Kan on Monday to exchange views before the G20 meeting. Shirakawa declined to tell reporters what was specifically discussed.
China has taken over from the United States as Japan's No.1 export destination.
But Tokyo has been more reserved than some of its G7 peers in its criticism of China's currency system on the view that pressuring Beijing could backfire. (Editing by Michael Watson and Joseph Radford)