NEC Electronics and Renesas Technology have announced plans for a merger to create Japan's largest semiconductor maker.
The two companies aim to integrate their operations by April 2010.
The combined company would become the world's number three chipmaker behind Intel of the United States and Samsung Electronics of South Korea.
A statement issued on Monday said the move was "in light of fierce global competition in the semiconductor market".
The BBC reports the microchip industry has been suffering because of oversupply, a lack of demand and falling prices.
Reports of a merger between the two companies have been circulating for several weeks.