BEIJING Oct 22 (Reuters) - Japan and South Korea moved to reduce their dependence on China's rare earth metals on Friday amid fears export reductions by Beijing could be the trigger for a broader trade conflict as nations joust over currencies.

Reports this week that China halted shipments of rare earths to Japan during a sea territory dispute raised fears that Beijing could use its global dominance of supplies as a political lever.

China denied reports it planned to slash export quotas, but with more than 90 percent of the global production of rare earths coming from China, the reports triggered alarm. [ID:nTOE69J03D]

Japan, the biggest consumer of rare earth metals -- used in products ranging from cellphones to solar panels -- is set to agree on a plan with Vietnam later this month to expoloit minerals there, the Nikkei business daily said on Friday.

Bloomberg, meanwhile, said South Korea was seeking cooperation with Japan and the United States to jointly develop alternative sources. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on rare earth metals: r.reuters.com/bam39p

Graphic on production and use: r.reuters.com/nax47p

Insider tv reports: r.reuters.com/gyk39p r.reuters.com/juz58p

Factbox on rare earth elements: [ID:nN09251080]

Analysis of impact of shortages: [ID:nSGE69J0BC] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Japanese trading houses Toyota Tsusho Corp (8015.T: Quote) and Sojitz Corp (2768.T: Quote) are already preparing for rare earth development in Vietnam, while Sumiotomo Corp (8053.T: Quote), another trading firm, aims to start rare earth shipment to Japan from Vietnam as early as 2013, the Nikkei said.

The agreement will be reached when Japanese Prime Minister Naoto Kan and his Vietnamese counterpart, Nguyen Tan Dung, meet in Hanoi on Oct. 31, the newspaper said.

Responding to the report, Sumitomo and Sojitz said plans were still in early stages.

HIGHER DEMAND

Bloomberg quoted Kim Sang Woo, a deputy director at the Minerals Resources Division of South Korea's Knowledge Economy Ministry, as saying he expected China would maintain export caps and increase stockpiles to meet higher demand.

Sun Zhenyu, ambassador to the World Trade Organization, told Reuters Insider that China's own stocks of the rare metals, for which it is the dominant supplier, were falling fast and that Beijing had to conserve them. [ID:nLDE69K2AU]

"I think there will be probably not a very quick change in the export quota mechanism of rare earths," Sun said in an interview on the trade implications of the five-year-plan, unveiled this month.

China's media has accused Western countries of making unreasonable and hypocritical demands over the cheap supply of rare earths.

"Rare earths are a commodity. Each country has the right to decide how much it exports or imports. This is normal economic behaviour," the People's Daily said.

"China has the absolute right to decide for itself how much rare earths it can export and produce."

But any cut in Chinese exports could rattle firms that use the metals to make parts for vehicles, computers and cell phones, missiles and new energy technology.

A slowdown in shipments may reflect a sharp drop in export quotas, which has left over-committed traders scrambling to cover orders placed in the first half of the year, analysts say.

The rare earth concerns come as chances of global agreement to tackle global economic imbalances and fend off the prospect of damaging currency devaluations looked set to evade finance officials at the G20 meeting in South Korea.

G20 finance officials started their formal meetings on Friday with nations from the developing world and Japan dismissing U.S. proposals to set limits on current account balances in an effort to defuse tensions over currencies that economists fear could trigger trade wars.

Experts say Vietnam is one of the main channels for smuggling rare earths and other minerals out of China, a practice that has grown as China's more limited quotas reduce legal channels for export.

About 20,000 tonnes of rare earths were smuggled out of China in 2009, according to a note from by Eurasia Group analyst Damien Ma, supplementing legal exports through that year's quotas of about 50,000 tonnes. (Reporting by Ben Blanchard; Writing by David Fox; Editing by Nick Macfie; david.fox@thomsonreuters.com; +65 6870 3815) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)

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