While MTFG's offer falls short of the nearly $35 billion being offered by SMFG, it will likely satisfy UFJ shareholders, analysts said, given doubts about SMFG's ability to absorb UFJ and UFJ managers' strong preference for MTFG.
"We arrived at what we believe is the best overall decision for our shareholders, taking into account (MTFG's) ability to carry out a successful integration and the complementarity of our two groups," UFJ President Ryosuke Tamakoshi told a news conference. "We think (MTFG's bid) appropriately reflects shareholder value even when compared with SMFG's proposal," he added.
If successful, the merger would be the largest ever in corporate Japan. It comes as a revitalised banking sector sheds years of accumulated bad debt and seeks new alliances to boost profit and cut dependence on low-yielding corporate loans.
Under the deal, MTFG shareholders would get one share in the merged company, to be called Mitsubishi UFJ Financial Group, for each MTFG share, while UFJ shareholders would get 0.62 share for each UFJ share.
Mitsubishi Tokyo had said it needed time to examine UFJ's bad loan-ridden books before setting merger terms. But MTFG had steadily consolidated its position as front-runner in the take-over struggle well before Friday's announcement.
MTFG injected 700 billion yen into UFJ last year to help the smaller bank cut billions of dollars' worth of bad loans, and the two groups have already begun combining operations ahead of the October target date for the merger.
Sumitomo Mitsui, meanwhile, has shown signs of giving up on its spoiler bid, and financial sources said earlier this month that the bank is instead considering a merger with long-time ally Daiwa Securities
SMFG and Daiwa announced separately on Friday that they would merge their venture capital units, Daiwa's NIF Ventures Co Ltd and Sumitomo Mitsui's SMBC Capital, in October.
SMFG may also fall short of its full-year profit target due to higher-than-expected charges for problem loans, bank sources have said, and analysts question if SMFG could absorb UFJ without raising outside capital.
"It would be tough for SMFG to complete a merger" with UFJ, said Hironari Nozaki, an analyst at Nikko Citigroup, adding that the price offered by MTFG was "fair".
A merger of MTFG and UFJ would create the world's biggest bank with about $1.8 trillion worth of assets, surpassing Citigroup of the US and Japan's Mizuho Financial Group
The 3.05 trillion yen ($28.9 billion) deal would top the 2.7 trillion yen union between Sakura Bank and Sumitomo Bank in 2000 which created Sumitomo-Mitsui, according to data firm Dealogic.
UFJ has lagged other banks in cleaning up its balance sheet, but has stepped up disposals of bad loans ahead of the planned merger, reducing exposure to long-time problem clients such as supermarket chain Daiei Inc
UFJ is the only big Japanese bank that has failed to pull itself out of the red amid the sector's recovery. The bank expects to post a 750 billion yen loss in the business year ending in March due to the high cost of shedding risky loans.