updated 7/27/2004 8:36:58 AM ET 2004-07-27T12:36:58

The planned merger between two of Japan's megabanks to create the world's biggest bank ran into a major obstacle Tuesday when a Tokyo court demanded the merger talks be scrapped. UFJ Holdings Inc., one of the banks, said it will fight the order.

The Tokyo District Court decision to stop the merger talks between UFJ, Japan's fourth biggest banking group, and larger rival Mitsubishi Tokyo Financial Group Inc. was in response to a request put in by Sumitomo Trust shortly after the merger proposal was announced earlier this month.

Sumitomo Trust had an earlier agreement with UFJ to buy UFJ's trust banking operations. Sumitomo Trust requested the court stop the merger talks, saying that such talks were a violation of its agreement with UFJ.

UFJ said Tuesday it has decided to submit an objection to the order with the court.

Under Japanese law, the court listens to any objections and then generally gives another decision. The case could move to a higher court if it is not resolved in the district court.

An official at Sumitomo Trust, speaking on condition of anonymity, confirmed that the company had received a notice from the court about its decision to halt the deal.

The court refused comment, saying such cases are not public like lawsuits.

The prospects of Sumitomo Trust gaining in such size through the acquisition of UFJ's trust banking unit are largely viewed as one motive for Mitsubishi Tokyo's interest in merging with money-losing UFJ.

UFJ and Mitsubishi Tokyo, two of Japan's "Big Four" banking giants, announced July 16 that they were formally in merger talks targeting a basic agreement by the end of the month to try to merge by September 2005.

With combined total assets of around $1.7 trillion, UFJ and Mitsubishi Tokyo would create the world's largest bank by assets, surpassing U.S.-based Citigroup Inc.'s $1.19 trillion.

The move by the banks underlines a streamlining trend in this nation's long-struggling financial system. All of the Big Four, which also includes Mizuho Financial Group and Sumitomo Mitsui, were formed in recent years through mergers.

Although analysts and the Tokyo stock market have generally welcomed the possible merger as stabilizing force for Japan's overall financial system, fears remain about the health of UFJ's books.

UFJ is saddled with troubled borrowers such as giant retailer Daiei. It has also been reprimanded by the Financial Services Agency for being evasive during regulatory inspections.

And the sheer size of such a merger is likely to be filled with problems, from clashes of corporate cultures to the simple task of linking computer systems.

But the combination of UFJ's strengths in the retail market and regions outside Tokyo with Mitsubishi Tokyo's reputed international operations and major Japanese corporate clients is expected to be a positive complement.

The other three Big Four banks were profitable for the fiscal year ended March 31, but ballooning bad debts kept UFJ Holdings in the red and forced its top executives to step down. UFJ reported a loss of $3.7 billion for the latest fiscal year.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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