Putting the three banks together would create what has been dubbed the Citicorp of Japan, with 41, 000 staff worldwide, pipping Banque Nationale de Paris' attempts to create the world's first $1 trillion bank by taking over French rivals Paribas and Societe Generale, and leapfrogging Deutsche Bank with $899bn.
The Japanese three are expected to announce that they are to set up a joint holding company and begin merging their wholesale, retail and investment banking operations next March.
The move to bring the banks together follows strong pressure from the government on the banking sector to restructure. Any merger is expected to lead to branch closures and redundancies on a large scale, unheard of in post-war Japan.
Japan's banks are also seeking to achieve scale before the sector is opened up entirely to competition in March 2001.
"If they did not think they could cut costs they would not do this," said Christina Bruck, associate director of Fitch IBCA, the credit ratings agency. "There is considerable overlap between two of them, Fuji and DKB.
"The motivation is defensive," said Ms Bruck. "All Japan's banks are keen to make themselves big enough so that they can fend off competition ahead of the big bang deregulation in March 2001. Savings on information technology (IT) investment is also a big factor."
All three banks have already retrenched heavily abroad and have begun modest cuts at home. These are expected to be accelerated by today's deal.
DKB is Japan's second-largest lender. IBJ is the last of the industrial reconstruction banks set up to rebuild Japan's infrastructure after the Second World War
News that the banks were in talks sparked frantic activity on the Tokyo stock market yesterday before the exchange moved to quell the speculation by suspending the three banks' shares shortly before the end of trade. DKB later confirmed the banks were in talks but gave no details.
Analysts said that the deal was likely to open the floodgates for more consolidation in Japan's crippled bank sector. They said they expect in time the number of banks in Japan would shrink to six from the current 18.
Two smaller Japanese trust banks, Chuo and Mitsui, have announced plans to merge operations next year, although their deal is on a much smaller scale.
IBJ, DKB and Fuji have all made losses after massive write-offs to cover bad debts, a legacy of the fall of Japan's bubble economy of the 1980s.
The government has been pressing the banks to clean up their balance sheets in return for massive support. The three banks received a total of 2.5 trillion yen (pounds 14bn) from the 25 trillion yen fund set up by the government in March this year to recapitalise banking sector.
In the year ended 31 March, Fuji reported a loss of 392.9bn yen. Dai- Ichi Kangyo Bank lost 376.2bn while Industrial Bank of Japan lost 195.7bn.Reuse content