Japanese electronics giants Sony, Toshiba and Hitachi on Wednesday said they planned to merge their small and medium-sized liquid crystal display businesses for smartphones and tablet computers.
The move aims to create a new company, Japan Display, by Spring 2012.
Analysts say the entity would dominate the market, surpassing leader Sharp as well as growing rivals such as South Korea's Samsung and Taiwan's Chimei Innolux.
Japanese firms are looking to better compete against rivals in high resolution display technology as demand intensifies for smartphones, tablet computers and other gadgets, and as a strong yen erodes their competitive edge.
The company will be partly financed by the Innovation Network Corporation of Japan, a private-public investment fund established in 2009 to support next-generation businesses.
The government-affiliated body will invest around 200 billion yen ($2.6 billion) in the project and take a 70 percent stake, with Sony, Toshiba and Hitachi each holding 10 percent.
The companies said they planned to sign legally binding agreements later this year and complete the integration by spring 2012 as they seek to position themselves better in an intensely competitive market.
"By integrating each partner company’s wealth of display expertise and know-how, I am confident the new company will become a driving force for technological innovation and new growth in the rapidly expanding small- and medium-sized display market," said Sony CEO and President Howard Stringer.
Analysts say further consolidation is needed, with too many Japanese companies making the same products compared with the likes of South Korea and its industrial champions such as Samsung.
By merging operations, Sony, Hitachi and Toshiba will create a firm that can hold more than a 20 percent share of the market, compared to current industry leader Sharp which has about a 15 percent share.
The current strength of the yen against other major currencies also erodes Japanese firms' repatriated earnings and makes it harder for domestically-made goods to be competitive when sold overseas.
Such moves are inevitable as "it is difficult for Japanese companies to compete individually at the current yen rate", said Haruo Sato, analyst at Tokyo Tokai Research.
In June, technology giants Toshiba and Fujitsu said they would merge their mobile phone businesses in Japan to create the nation's second-largest cell phone maker.
Earlier this year Japan's biggest steelmaker Nippon Steel and third-ranked rival Sumitomo Metal Industries said they were working towards a merger that would create the world's second-largest steel firm by 2012.