Takashimaya Co., Japan's third-biggest department store chain, plans to merge within three years with smaller H2O Retailing Corp., which operates the Hankyu and Hanshin department stores.

The Osaka-based retailers will buy 10 percent stakes in each other to begin an operational alliance before the merger, according to a joint statement distributed at the Tokyo Stock Exchange.

At Friday's closing prices, the Takashimaya stake would be worth ¥23.5 billion and the H2O holding ¥10.1 billion.

Department store sales have slumped over the past decade as stagnant wages and an aging population sap consumer demand.

A merger would add to three takeovers announced in the local industry last year, including Isetan Co.'s acquisition of Mitsukoshi Ltd. to create Japan's largest department store chain.

H2O was formed last year following the October 2006 merger of two transport and retail groups in the biggest railway takeover in 60 years.

Takashimaya, founded in 1831, has stores in Taipei, Singapore and New York. President Koji Suzuki told reporters last October the firm wouldn't pursue takeovers as it was best able to cut costs on its own.

The outlook for Japan's retail sector has deteriorated further since then, with department store sales slumping for the past six months.

The fastest inflation in a decade is forcing consumers to tighten purse strings as costlier food and gasoline leave them less to spend amid sluggish wage growth. Household spending slumped 4 percent in August.