TOKYO, Aug 23, 2007 (AFP) - Mitsukoshi, one of Japan's most illustrious department stores, announced Thursday, August 23rd plans to merge with rival Isetan as Japan's purveyors of fine goods try to adapt to a rapidly changing market.

Isetan president Shinichi Muto (left) shakes hands with Mitsukoshi president Kunio Ishizuka (right) Photo : Yoshikazu Tsuno/AFP

The move, which will create a new industry number one, comes as some of Japan's most prestigious retailers struggle in the face of a population that is both ageing and shrinking.

Despite the economic recovery, Japanese consumers remain reluctant to loosen their purse strings after years of deflation.

The two companies said they had agreed to set up a joint holding company on April 1st next year if the plan is approved by shareholders next month. Both chains of department stores will retain their own names.

The tie-up is the latest round of consolidation in an industry trying to become leaner and more competitive in the face of a growing threat from large out-of-town shopping developments.

Despite their famous basement foodhalls, dozens of make-up girls and floor after floor of designer label clothing along with traditional kimonos, Japan's department stores have seen their combined sales fall for the past 10 years.

The holding company will be headquartered in Tokyo's glitzy Ginza shopping district, where Mitsukoshi operates one of its flagship stores.

Mitsukoshi, which is sometimes known as the "Harrods of Tokyo," has been trying to turn its business around through restructuring, closing its Osaka site and several other locations in 2005.

"We made this decision (to merge with Isetan) because we cannot be satisfied with the pace of our current approach," Mitsukoshi president Kunio Ishizuka told reporters.

"The two companies will understand and respect each others' corporate culture and history and make the best of our respective strengths in the aim of growing into one of the best retail service groups in the world," he said.

Isetan president Nobukazu Muto said that for his group, Mitsukoshi's strong foothold in the Japanese capital was a major attraction.

"We can have a good presence in Tokyo, which is one of the largest markets in the world," he said.

Upscale Mitsukoshi started out in 1673 selling kimonos and is now Japan's fourth-largest department store operator.

It operates 20 stores across the country, including its main Nihombashi store in Tokyo that even has a subway train station named after it. It also operates stores overseas in Asia, Europe and the United States.

Isetan, fifth-ranked in the industry, has seven directly run stores and owns six other group stores with clothing lines aimed at younger customers.

Isetan's Muto will take the job of chief executive of the new company, to be called Isetan Mitsukoshi Holdings, while Mitsukoshi's Ishizuka will be president and chief operating officer.

Each Isetan share will be exchanged for one share in the holding company, which will take the two department stores as fully owned subsidiaries, while each Mitsukoshi share will be exchanged for 0.34 shares.

by Harumi Ozawa