Shares of Mitsubishi Electric Corp and Hitachi Ltd. surged after the companies said they had entered into discussions to merge their system-chip businesses, which would create the world's fourth-biggest chipmaker.
Mitsubishi shares rose as much as 13 percent to ?596 with about 17 million shares changing hands in the morning, making them the most active by volume on Japanese exchanges.
Hitachi shares rose as much as 8.7 percent, and were the fourth most active with 11.5 million shares trading.
The merger -- the first among makers of system chips in the country -- comes as Japanese chipmakers cope with rising development costs and increasing competition from Taiwanese and South Korean rivals. Several Japanese chipmakers have already revamped their memory-chip businesses to keep pace with industry consolidation and slumping prices.
Mitsubishi Electric and Hitachi "are serious about reorganizing," said Nobuaki Kurisu, who manages ?7 billion (US$58.3 million) in Japanese equities at Sumisei Global Investment Trust Management Co, which holds shares of both companies. "This should prompt their rivals (Toshiba Corp and NEC Corp) to do the same."
The companies, which plan to form a joint venture within a year, have combined estimated system-chip sales of ?550 billion this fiscal year ending March 31.
System chips are typically used in DVD players and digital cameras. The chips include memory and processor functions on a single piece of silicon. Multipurpose chips take up less space than several chips with unique functions, meaning consumer- electronics makers can shrink the size of their products.
Japan's chipmakers are expecting losses of billions of dollars in the year ending March 31 because of plummeting prices of commodity-type chips, such as dynamic random-access memory chips, the main memory in personal computers.
The supply of system chips rarely exceeds demand because they are designed for specific customers.
In contrast, the supply of DRAM chips exceeded demand last year as Korean and US rivals increased production and demand for PCs fell. PC makers, such as Dell Computer Corp, buy DRAMs from many different suppliers.
Hitachi's chip business will post sales of ?510 billion in the year ending March 31, of which 56 percent, or ?286 billion, are from system chips.