Chinese and Japanese leaders have unveiled initiatives to tighten financial links between the two countries in measures that could expand use of China''s tightly controlled currency abroad. During a visit to Beijing by Japanese Prime Minister Yoshihiko Noda, the two governments said in a surprise announcement late Sunday that they will encourage use of their own currencies in bilateral trade, which now is conducted mostly in US dollars. They also agreed to support the sale of bonds denominated in China''s yuan by Japanese companies in Tokyo and foreign markets and by the state-owned Japan Bank of International Cooperation in mainland China''s markets, which are closed to most foreign investors. The pledges were a striking step for China and Japan, which are the world''s second- and third-largest economies and are bound by billions of dollars in trade but whose political relations often are strained over conflicting territorial claims and other disputes. "To support the growing economic and financial ties between China and Japan, the leaders of China and Japan have agreed to enhance mutual co-operation in financial markets of both countries and encourage financial transactions between the two countries," the governments said in identically worded statements. They said Japan''s government also planned to purchase Chinese government bonds, and an application process for official approval of that was under way. The governments gave no timetable for practical steps to put the pledges into action or the size of possible bond offerings. Commercial banks still have to create yuan-denominated letters of credit and other tools before traders in Japan can use the currency. The moves might reduce the dominance of the US dollar in East Asia, the world''s fastest-growing region. Japan''s Kyodo News agency cited a Japanese official who told reporters some 60 per cent of trade between Japan and China is now settled in dollars, which requires companies to convert money between yen, dollars and yuan, adding to their costs. Beijing controls the yuan''s exchange rate and the flow of money into and out of China''s booming economy. But the government has begun allowing limited use of yuan for trade. It said this month that some companies that obtain Chinese currency abroad will be allowed to invest it in mainland financial markets. Most trade in yuan is conducted through Hong Kong, where Beijing also has created a market for yuan-denominated bonds that McDonald''s Corp. and some other foreign companies have used to raise money to invest in their mainland operations. The easing of controls on bond sales could help to reduce costs for Japanese companies that need to raise money to invest in their China operations. The latest pledges also might help to promote moves to allow the yuan to trade more freely on currency markets. The United States and other trading partners complain that Beijing''s currency controls keep the yuan undervalued, giving China''s exporters an unfair price advantage and hurting foreign competitors at a time when the global economy is struggling.