UPDATE: MUFG, Morgan Stanley Japan Sec Units To Merge-Source

Mitsubishi UFJ Financial Group Inc. (8306.TO) will likely merge its brokerage unit with Morgan Stanley's (MS) Japan unit next year and hold a 60% stake in the combined entity, a person familiar with the matter said Wednesday.

The merger announcement between unlisted Mitsubishi UFJ Securities and Morgan Stanley Japan could be made as early as this week, the person added.

MUFG aims to merge the brokerage units in the spring of 2010 after establishing an intermediate holding company where the new brokerage and affiliated companies will operate.

If the merger is completed, it would create the nation's third largest brokerage firm in terms of operating revenue after Nomura Holdings Inc. (8604.TO) and Daiwa Securities Group Inc. (8601.TO).

A Morgan Stanley spokesman in Tokyo declined to comment on the status of merger talks, while MUFG said in a statement that there was no truth to reports both companies had agreed to the merger.

Last September, Japan's largest bank invested $9 billion to buy a 21% stake in Morgan Stanley following the collapse of Lehman Brothers in the wake of the U.S. subprime mortgage lending crisis.

Both MUFG and Morgan Stanley have been in talks and have said they aim to release more details on their relationship by June 30.

The possible deal could compliment Mitsubishi UFJ Securities' retail network and Morgan Stanley's expertise in investment banking operations such as its M&A advisory business.

-By Atsuko Fukase, Dow Jones Newswires; 813-5255-2957; [e-mail]