* Japan PM: to cooperate with G7 on forex issues
* S.Korea President: G20 should discuss forex coordination
* Zoellick: should consider steps to control flows- Nikkei
* IMF warns such actions are undesirable
(Adds Zoellick quotes on capital controls in paras 10-13 to clarify his position)
By Yoko Nishikawa
TOKYO, Oct 7 (Reuters) - Japan and South Korea on Thursday sought to calm a brewing global row over exchange rates with pledges to work closely with their peers on challenges posed by economic imbalances driving currency markets.
Japan drew fire from its partners last month when it intervened on its own to cap the yen's rise, while South Korea has repeatedly bought U.S. dollars in markets to keep its won down, buying an estimated $11 billion just in the past two weeks.
As the yen shrugged off last month's action and scaled another 15-year high against the dollar on Thursday, Japan's Prime Minister Naoto Kan warned that Tokyo was ready to act decisively in response to sharp currency moves.
But he also said Japan would cooperate with its Group of Seven partners on currency issues. [ID:nTKF107034] [ID:nTKG006895] [FRX/]
In similar vein, South Korean President Lee Myung-bak, who will chair next month's summit of the Group of 20 leaders in Seoul, said it should discuss coordination of foreign exchange policies. [ID:nTOE696043]
The divisive issue whether and how nations should influence their exchange rates is pitching rich nations against mostly developing economies in Asia and Latin America and is due to be a hot topic at the Group of Seven and the International Monetary Fund meetings starting on Friday in Washington D.C.
Western leaders are worried efforts by emerging economies to weaken their currencies to support exports could derail the fragile global economic recovery. Officials from developing markets say ultra-low interest rates in rich countries are fuelling massive fund flows into their markets, pushing up their currencies and inflating prices of stocks, property and other assets.
Graphic showing trade weighted currencies since 2007:
http://r.reuters.com/qun86p
For a PDF on the so-called "currency war" click on:
http://r.reuters.com/dyw27p
FEAR OF "CURRENCY WAR"
To limit the rise in their currencies, nations from South Korea to Brazil have moved to restrain capital flows or relied on market intervention, fanning fears that such isolated actions could escalate into devastating "currency wars."
Foreign exchange reserves in Japan, South Korea and Taiwan swelled to record highs in September, largely reflecting authorities' efforts to curb rises in their currencies via market intervention.
On Thursday, Taiwan joined the fray when its central bank inspected currency forwards trades at banks as part of its campaign to keep its currency in check and protect the economy from what it sees as the destabilising effects of speculation, a source said. [ID:nTOE69602U]
World Bank President Robert Zoellick said policymakers should be careful if considering capital controls.
"I think countries should move towards an open capital account position, but I think one can be pragmatic about how one regulates how money comes into a country," he said in an interview with Japanese newspaper Nikkei, according to a transcript issued by the World Bank.
"But one has to be careful because sometimes one person's regulation becomes another person's strangulation, so I would err on the side of being able to have fluidity in investment."
The World Bank issued the transcript of the interview after Nikkei quoted Zoellick as saying emerging market officials should consider measures to control short-term capital inflows.
IMF deputy managing director, Naoyuki Shinohara, said it was natural and welcome for money to shift into economies with strong growth and policymakers should not try to curb such flows or use intervention to defend specific currency targets.
"When there are occasionally volatile moves in the market, intervention cannot be ruled out," he told Reuters in an interview in Washington on Wednesday.
"But it's totally undesirable for a country to intervene consistently to keep currencies at a certain level."
SLAP ON THE WRIST
Shinohara, who was Japan's currency tsar before assuming the IMF post, warned Tokyo faced a losing battle trying to go against the tide and weaken the yen as monetary conditions in the United States and Europe are expected to remain easy.
"This is not something that Japan can control. If Japan tries to adjust this, it will distort markets," Shinohara said, adding that Tokyo should instead focus on structural reforms and monetary easing to beat deflation.
Japan sold the yen for estimated $25 billion in the currency market in September when it intervened for the first time in six years and has tried to placate its peers by highlighting how damaging the yen's climb was for an economy mired in deflation.
Deputy finance minister Mitsuru Sakurai admited on Thursday it would be hard to guide the G7 discussion on currencies in the way Tokyo wanted.
(Additional reporting Stanley White, Jeanny Kao in TAIPEI, Yoo Choonsik in SEOUL, Leika Kihara in WASHINGTON; writing by Tomasz Janowski; editing by Kazunori Takada and Bill Schomberg)