Japan's Sumo Bank

From electronic gadgets to bonsai trees to dinner portions, the Japanese are famous for doing things small. But in sumo wrestling and banking, gigantism is the order of the day. At a press conference last week, officials at UFJ Holdings and Mitsubishi Tokyo Financial Group (MTFG) announced they had agreed to begin negotiating a merger that could create the world's largest bank, a monster with $1.75 trillion in assets, overshadowing Japan's Mizuho Holdings and U.S.-based Citigroup, both with approximately $1.3 trillion in assets as of March.

The deal, if approved by regulators and shareholders, could create a bank with the size and the diversity of products to be Japan's first globally competitive financial institution. But it would not be a merger of equals. While most large Japanese banks have cleaned up their balance sheets and are profitable once more, UFJ, the country's fourth largest bank, remains beset by bad loans. After recently reporting its third straight year of losses, it may have to merge or eventually face a government-run restructuring. Critics of the proposed deal are worried that MTFG (arguably Japan's healthiest bank) might be dragged down by a basket case like UFJ. Says Nana Otsuki, a credit analyst at Standard & Poor's: "It's just a weak bank hanging on a stronger one."

Japan's banks have been congratulating themselves for their recent turnaround, but critics say they should start concentrating on improving profit margins, not increasing their assets. As any bonsai artist will tell you, big is rarely beautiful.