Mitsubishi UFJ Financial Group (MUFG), Japan’s biggest banking group, has swooped into the heart of Wall Street with a $9 billion (£4.9 billion) cash injection to shore up the capital condition of Morgan Stanley.

The Japanese bank’s billions – a combination of $3 billion in common stock and $6 billion in convertible preferred shares – will give it a 21 per cent stake in the blighted American group.

Sources close to the negotiations told The Times that in the past few days MUFG had been “sitting more comfortably in the driving seat” of the deal with Morgan Stanley.

As well as effectively forcing Morgan Stanley to enter a strategic alliance on retail operations, asset management and international investment banking, the deal suggests that capital starvation on Wall Street has forced even the best names to raise money at a high price.

That, traders in Hong Kong argued, was apparent in the terms of the deal: the common stock will be bought for $25.25 per share, 19 per cent down on its price a month ago, while the preferred stock will yield a generous 10 per cent dividend for the Japanese.

Trading in Morgan Stanley in New York reflected the market’s dim view of the deal, with the shares down almost 16 per cent, or $3.97, at $20.78 in afternoon trading.

Analysts in Tokyo were not convinced that MUFG had made the right move. Banking analysts at Fox-Pitt, Kelton said that $9 billion was a large investment, even for a bank as well-capitalised as MUFG.

Its capital adequacy ratio could fall to about 10 per cent from its present level of 10.7 per cent in exchange for “nebulous strategic benefits of a minority stake” at a turbulent time for the financial system.

The stake, which is slightly more expensive and bigger than the one under discussion between the two banks last week, marks the second significant reappearance of Japan on the international banking scene after a long absence in obscurity.

Last week, Nomura bought the Asian and European operations of Lehman Brothers and Sumitomo Mitsui said that it was standing by with a possible $2 billion should Goldman Sachs ask for an investment.

Analysts in Tokyo said that the moves had reminded markets worldwide that the Japanese banking titans had emerged as some of the best-capitalised houses in the industry, despite their own financial crisis five years ago.

Toshihide Mizuno, senior managing director of MUFG, said that, while it was taking half its stake in preferred shares, eventually it would own a fifth of Morgan Stanley.

In one year, half the preferred stock can convert into common if Morgan’s stock trades for more than 150 per cent of the conversion price, or roughly $47, for a certain period.

“Considering the current state of the economy and the market, we wanted to minimise and hedge our risk,” Mr Mizuno said.

John Mack, Morgan Stanley’s chief executive, said that Mitsubishi’s investment was “a strong endorsement of Morgan Stanley’s world-class global franchise and future potential. This strategic alliance offers a powerful opportunity to accelerate Morgan Stanley’s transition to a bank holding company.”

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