The Industrial Bank of Japan (IBJ) indicated yesterday that it was preparing to forge an alliance with two large rivals to create the world's biggest financial group with assets of about $1,300 billion (€1,223 billion).

The alliance with Dai-Ichi Kangyo Bank and Fuji Bank, if it proceeded, would speed up consolidation in the Japanese banking industry, where the number of big banks has fallen from 21 to 16 in the past two years.

The move comes as Japanese regulators are cracking down on banks to encourage them to clean up their bad loan problems.

Regulators also expect the banks to implement restructuring measures in exchange for the injection of 7,450 billion yen (€63 billion) of public funds into 15 banks earlier this year.

One official said: "(These alliance plans) are evidence that the banks are getting more serious about reform - until now they have been too slow."

Some investors said the move was another sign that corporate restructuring was gathering pace in Japan. The stock market rallied after reports about the alliance were leaked to local media and the yen rose to 111.3 against the dollar, a six-month high.

Jesper Koll, an economist at Merrill Lynch, said: "People see lots of reasons to hold Japanese assets, rather than dollar assets, now."

The three banks involved have refused to reveal details of their talks. They plan to make an official announcement today but officials warned that the final details might not emerge until the end of the month.

Local media reports said the banks were considering forming a joint holding company by autumn 2000. The holding company would include investment banking, retail banking, and brokerage units, and is likely to include DaiIchi Mutual Life and Yasuda Trust, which have alliances with the Industrial Bank of Japan and Fuji Bank, respectively.

In asset terms the group would leapfrog Deutsche Bank, which has assets of $735.2 billion, as the world's largest financial group.