Japan’s largest bank will purchase 20 per cent equity in Morgan Stanley as part of a strategic alliance, according to a letter of intent entered into by the two firms.

The news followed a week of speculation around merger talks with Charlotte, North Carolina–based Wachovia bank and a potential capital injection by a Chinese sovereign wealth fund.

The investment by Mitsubishi UFJ Financial Group is based on Morgan Stanley’s book value as agreed upon completion of due diligence and is believed to be worth Y900 billion or about $8.39 billion.

Mitsubishi UFJ is Japan’s largest banking group and the world’s second largest bank holding company with $1.1 trillion in bank deposits.

John Mack, Morgan Stanley’s chairman and chief executive officer, said the “alliance” would build on Morgan Stanley’s business in Japan and throughout Asia, helping the firm to continue growing “in this critically important region.”

It’s the second opportunistic play by a Japanese financial institution as American institutions continue to seek investments to shore up capital; troubled Lehman Brothers is believed to be in talks to sell some of its Japan assets to Sumitomo Mitsui Financial Group in a bid to save its operation in the country.

Morgan Stanley’s Global Wealth Management business currently employs 8,000 financial advisors.

Yesterday Morgan Stanley, along with rival Goldman Sachs, announced it had been given the green light by the US Federal Reserve to extend its status to that of a commercial bank.