Merrill Lynch is in talks with Mizuho Financial Group, Japan's second largest bank, to secure a $1 billion cash injection as the financial group’s sub-prime related miseries deepen.

Sources at Mizuho Financial Group told Times Online that the Japanese titan was in the final stages of securing a “major tranche” of preferred shares in the struggling Wall Street firm.

The deal, say analysts, is likely to trigger a series of similar moves by the rest of Japan’s “big three” financial houses, which now view the US banking sector as both wounded and rife with investment opportunity.

Tokyo-Mitsubishi UFJ and Sumitomo Mitsui are both understood to be eyeing multibillion-dollar investments in Wall Street firms, but, say insiders, are only likely to spring into action when specifically asked to become investors.

Citibank, Lehman Brothers and Bear Sterns are among US firms rumoured to be already in talks with Japanese banks, as well as other Asian investors and sovereign wealth funds.

Tension is already building as the major Wall Street firms prepare to release quarterly earnings numbers later this week, with many expected to paint ever gloomier pictures of their exposure to the sub-prime fallout.

Merrill Lynch is understood to have approached Mizuho along with several other Japanese financial houses in its quest for emergency funding.

Despite the overall havoc that the sub-prime crisis has wreaked on the Tokyo stock market in recent months, Japanese banks have emerged from the debacle relatively unscathed, and with ample cash to pour into buying shares of battered American banks.

The Mizuho deal, which is expected to be formally announced later this week, represents the first time since 1989 that a Japanese financial house has taken a substantial stake in a “bulge bracket” US or European banking name.

The bursting of the Japanese bubble in 1990 initially left the country’s financial firms crippled. Even when they eventually recovered, they remained ultra-conservative when contemplating overseas expansion.

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