Mitsubishi UFJ Financial Group Inc <8306.T> and Morgan Stanley are set to announce this week a merger of their securities businesses in Japan, a source said, creating a new powerhouse to rival industry leaders Nomura Holdings <8604.T> and Daiwa Securities Group <8601.T>.

The two have been in talks to combine their brokerage and investment banking operations in Japan since Mitsubishi UFJ Financial injected $9 billion into Morgan Stanley in October to prop up the crisis-hit U.S. bank.

Mitsubishi UFJ, Japan's largest lender, plans to take a 60 percent stake in the Japanese venture it forms with Morgan Stanley, the Nikkei business daily reported.

The merger plans will be announced this week, a source with knowledge of the matter said.

Together Mitsubishi UFJ Securities and Morgan Stanley would have ranked first last year in advising on mergers and acquisitions in Japan, first in underwriting yen bonds and third in share offerings, Thomson Reuters data shows.

The union comes as Citigroup looks to sell its brokerage arm, Nikko Cordial Securities, to raise cash. Mitsubishi UFJ has been named as one of the potential buyers of that business.

I expect the joint venture to replace Citigroup's Japanese business as the third-largest force, said Wataru Kasatani, a financial analyst at Meiji Dresdner Asset Management Co.

Mitsubishi UFJ has a big customer base in Japan through its banking business, but it has been weak in M&A and equity underwriting businesses. It wants to strengthen these areas by forming the venture.

Mitsubishi UFJ and Morgan have said they planned to purse a strategic alliance spanning a range of businesses, from retail banking and wealth management to capital markets.

Mitsubishi UFJ said in a statement that no deal had been reached in Japan. A spokesman at Morgan Stanley in Tokyo declined to comment.

TAKING ON NOMURA

The joint venture would create Japan's biggest M&A adviser, topping Nomura Holdings, which has dominated this business and hoped to get even stronger through its acquisition of parts of failed U.S. bank Lehman Brothers late last year.

Nomura will remain hard to beat in equity underwriting, where it has topped the chart in Japan for six straight years. The MUFG-Morgan Stanley venture would rank third in this area based on Thomson Reuters figures.

Mitsubishi UFJ has performed well in debt underwriting, however, ranking second in yen bonds last year. Together Mitsubishi-Morgan would have been No.1 in this sector, surpassing Daiwa Securities SMBC.

But analysts warn that Mitsubishi and Morgan could face hurdles to meshing their different cultures, similar to the challenges Nomura is now grappling with in trying to integrate Lehman Brothers staff.

Japanese financial institutions tend to be more conservative and have management and pay structures based more on seniority than Western banks, which dole out a much larger share of salaries in bonuses and generally pay a lot more.

The two firms are absolutely different in culture and salary structure, he said. Mitsubishi UFJ may have to work hard in retaining Morgan Stanley people.

(Additional reporting by Gerald E. McCormick in New York and Taiga Uranaka in Tokyo; Editing by Hugh Lawson)

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