Reuters

BEER is serious business in Japan. When employees of Mitsubishi Corporation, a huge trading house, go on a beer binge they are (informally) required to quaff Kirin—a company under Mitsubishi's wing. Similarly, parties at Sumitomo Mitsui Financial Group serve only Asahi, a big client of the bank. Corporate Japan teems with these ties, which makes striking new alliances or mergers hard.

But not too hard when there is an absolute necessity. On Tuesday July 14th Kirin and Suntory, two of Japan's biggest beer and beverage companies, announced they were in merger discussions. The mere fact that they are in talks promises to shake up not only the international drinks market, but corporate Japan too.

The combined firm would be one of the world's biggest drinks companies, with sales of ¥3.8 trillion ($41.1 billion), around 45% from alcoholic beverages alone. It would control half of the Japanese beer market—raising an antitrust hurdle before the deal can go through. But in Japan such transactions move slowly: the companies, which began talks last year and already co-operate on some procurement and distribution, plan to seal a deal by the end of the year and integrate operations a few months later.

A merger is vital for the firms. The Japanese market is dominated by four big drinks companies (the other two are Asahi and Sapporo, a smaller rival). Joining forces will allow Kirin and Suntory to save money through joint procurement. They could join forces to buy aluminium cans, the single biggest cost of each drink they sell, as well as raw ingredients such as malt. It will also give the new firm greater pricing power.

But the main motivation for the deal is the state of the global market. The domestic business is shrinking as Japan's population ages and declines, and consumer tastes shift from beer to wine and other drinks. Beer consumption has fallen by three-quarters over the past 15 years. The overall market for alcoholic drinks is declining as well, according to Intage, a market-research firm. So the Japanese firms need to go abroad for growth.

Yet when they do, the bump up against bigger rivals. In recent years, mergers have created powerhouses such as Anheuser-Busch InBev and SABMiller. The only way to compete—in order to move into new markets, form alliances, or buy overseas firms—is to have greater heft, which the merger would provide.

Indeed, over the past year both Japanese firms have made international expansion the cornerstone of their strategy. In April Kirin said it would buy a controlling stake in Lion Nathan, an Australian brewer, for around $2.4 billion, and it acquired nearly half of San Miguel Brewery of the Philippines for $1.2 billion in February. Meanwhile, Suntory bought Frucor, a juice firm, from France's Danone earlier this year for around €600m ($837m). If the Kirin-Suntory merger happens, the combined firm will use its greater strength to compete more forcefully around the world.

However, combining the companies will be difficult. Kirin is a public company that is tied to one of the country's biggest conglomerates. Suntory is a private, family-run firm. And the deal faces a particularly domestic obstacle: trimming costs usually entails shedding staff, culling less profitable brands and closing redundant factories. All these measures are generally resisted by Japanese managers or only take place in time scales measured in years, not months.

That the firms are considering a deal is a big surprise for corporate Japan, and will act as a test case for how a new wave of mergers might take place. The deal involves two winners in their industry, not a distressed firm looking for a corporate saviour, as is the custom (Panasonic's recent agreement to buy Sanyo is a good example).

If the integration goes well, it could set an example for other Japanese companies that need a global presence to compete, but are reluctant to team up with others. Many industries—from electronics and cars to machinery, steel and chemicals—are composed of several excellent companies, but such an abundance of mediocre ones that the best ones are starved of resources.

How Kirin and Suntory deal with their overlapping operations—and their wide-ranging non-core divisions—will be closely watched. Both companies have sprawling operations that could do with paring. Among Kirin's roughly 400 subsidiaries are a bio-chemical firm, a property company, hotels, a tennis club, and even a flower company. It also boasts pharmaceutical businesses that account for 8% of sales and a pleasant 17% of income.

Likewise, Suntory is stuffed with an IT-services firm, a chain of fitness clubs, silverware and jewellery shops, an advertising agency and a flower company of its own. If a deal goes through one of the first jobs of a merged management team may well be to spin off these combined flower arms.