Fuji Bank says it will acquire 50% of the shares in the Yasuda Trust and Banking Company for ¥300bn ($2.6bn).

The deal will come through the purchase of a new issue of common stock and will be completed by 31 March.

Fuji Bank is one of Japan's strongest

It is one of the biggest deals in the wave of consolidation that has swept through Japan's beleaguered financial community. The new banking group will be the second largest in Japan, with $544bn (¥62 trillion) in assets and 365 branches.

"This is just the beginning of the restructuring of the Japanese financial system," said Masahuru Kakutani of Moody's Japan. "We have no doubt that in Japan some financial institutions will have to emerge as winners. But we still do not know who it will be."

The news will come as a relief to the Japanese government, which has already been forced to take over two of Japan's biggest banks - Long Term Credit Bank and Nippon - because of their huge bad debts.

Yasuda, which had been asking for government financial assistance, was regarded as the next bank likely to fail. Fuji, the new owners, will still ask for government aid of ¥500bn - ¥700bn ($4.3bn - $6bn).

Debt burden

The whole Japanese banking sector is suffering from an overhang of bad debts from the years of the 'bubble economy' which total more than $600bn.

The government has announced a huge rescue package to aid financially troubled banks with loans and to acquire those that cannot be rescued.

But it has always hoped that the stronger banks could contribute to the process by merging with weaker rivals. Last year the government tried to promote a merger between Long Term Credit Bank and Sumitomo before the scale of LTCB's debt problems scuppered the deal.

Fuji and Dai-Ichi Kangyo bank have already formed a joint trust bank which will take over Yasuda's pension assets.

Moody's, the ratings agency, has recently downgraded the credit of some of the largest Japanese banks, including Sumitomo, Bank of Tokyo-Mitsubishi, and Sanwa.

However, it upgraded the rating of Yasuda after the news of the merger.