Two of Japan's leading financial institutions announced plans yesterday to form the world's second-biggest bank. The move points to a profound shift in the country's corporate landscape.

Sumitomo Bank and Sakura Bank said they would forge a capital tie-up this year with a view to full merger by April 2002. With combined assets of 98.7 trillion yen (€850 billion), the new institution would instantly be a global heavyweight, comfortably exceeding any European or US rival in size.

It would be second only to another recently announced Japanese alliance - the planned three-way tie-up between Dai-Ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan, which have combined assets of 140 trillion yen.

But the implications of yesterday's deal are likely to be far greater. Sumitomo and Sakura are core banks for two of Japan's biggest and most prestigious business groups. Sumitomo is the main lender for NEC, Mazda, Asahi Beer and the Hanshin department store, while Sakura is at the heart of the 300-year-old Mitsui group, which includes Marubeni and the Mitsukoshi department store, and has close ties to Toyota.

Newspapers expressed amazement that these traditional rivals, with their origins in the "zaibatsu" conglomerates of the pre-war years, were willing to join forces. The two groups employ almost half a million people, so analysts said the move could accelerate restructuring in other industries. "This suggests that not only the banking sector but the whole corporate landscape is changing - and fast," said Mr Brian Waterhouse of HSBC Japan. "We may be standing on the threshold of a huge transformation in Japan Inc."

Government officials welcomed the shift. "It is a good thing because the two banks are crossing the borders of their business groups," said Mr Michio Ochi, chairman of the financial reconstruction commission.

Finance Minister Mr Kiichi Miyazawa said the tie-up was good news for the Japanese economy.

The two banks said their priority was to increase efficiencies through the merger, which will be carried out on an equal basis. They reworked earlier promises to reduce their 31,300 workforce by 6,300 and to close 183 of their 807 branches by April 2002. The two banks also pledged to reduce their combined 3.8 trillion yen in bad loans by 200 billion yen per year.

Such restructuring is crucial for the Japanese financial system, which teetered on the brink of collapse last year. Hit by bad loans and a domestic recession, three of the country's 20 biggest banks have folded or been nationalised in the past two years. Last April, the remaining institutions collectively received a 7 trillion yen infusion of public funds to bolster dwindling capital reserves.

Last year, Sakura Bank was targeted as one of the most likely banks to collapse. For the most recent fiscal year, which ended on March 31st, it posted a loss of 479 billion yen, five times worse than the year before.

Yesterday, however, the share prices of the two banks surged by 11 per cent - the maximum allowable in one day.

Sakura and Sumitomo said they would cut 32 overseas branches.