Mitsui Trust is the third biggest trust bank in Japan in terms of assets, while Chuo Trust is the sixth.

The banks said in a joint statement that Chuo Trust will be the surviving company under the planned deal, with a merger ratio expected at one Mitsui Trust stock to 0.3 Chuo Trust stock.

The planned merger would create the number one bank in trust banking sector with over 200 billion yen ($1.75 billion) of annual operating profit, they said.

Analysts said that the announcement of the possible merger was surprising to some extent because Mitsui Trust is a member of the Mitsui corporate group led by Sakura Bank, a major commercial bank.

However, they also said that the move is reasonable at a time when the government is pressuring the nation's major banks, saddled with hefty problem loans, to clear up their balance sheets through publicfund injections or through mergers.

Trust banks engage in both ordinary banking business and in trust business, in which they manage investors' funds.

"The banks will use public funds to facilitate their merger... The size is quite important for trust banks as they need big cash for their computer systems compared with commercial banks," said a financial analyst.