Japan bank merger in jeopardy

A MERGER to form the world's largest banking group ran into legal opposition today with Japan's Sumitomo Trust threatening to sue UFJ.

UFJ, Japan's fourth-largest bank, cancelled plans to sell its trust bank unit to Sumitomo after instead launching merger talks with Mitsubishi Tokyo Financial Group, Japan's second-largest bank. Sumitomo Trust said it cannot accept the cancellation.

However, it is unlikely to delay talks between UFJ and MTFG towards a deal. Investors welcomed the news as a possible solution to lossmaking UFJ's problems.

UFJ and Mitsubishi Tokyo shares were suspended from trade for nearly two hours today and were then bid-only amid a rush of buy orders. UFJ was widely tipped to make the overture to MTFG but only formally decided to do so at a board meeting today.

The decision to scrap the trust-banking sale to Sumitomo was also taken then.

News of the deal was greeted with optimistism. 'UFJ will be able to survive, and that's a big plus for the bank,' said Nozomu Kunishige, an analyst with BNP Paribas Securities in Tokyo.

With combined total assets of 188 trillion yen (£940m), the two banks would create the world's largest bank by asset value, surpassing US-based Citigroup and Japan's Mizuho Financial Group.

UFJ reported a massive loss for the last fiscal year and was reprimanded by the Financial Services Agency last month for being evasive during inspections by regulators.