Nissan Motor and Mitsubishi Motors confirmed on Thursday they were discussing a possible capital tie-up, after reports that the former was looking to take a roughly one-third stake in its scandal-hit rival.
"Nissan and Mitsubishi are discussing various matters including capital cooperation, but nothing has been decided," the two Japanese automakers said in separate statements. They added that their boards of directors were meeting in separate meetings on Thursday to discuss the matter.
Nissan is in advanced talks to take about a one-third stake in Mitsubishi Motors with a 200 billion yen ($1.85 billion) investment, as Mitsubishi struggles with a fuel-economy data scandal, two people familiar with the matter said.
The Tokyo Stock Exchange said on Thursday that shares in Mitsubishi Motors were suspended, as reports of the talks emerged.
If the 200 billion yen deal goes through, Nissan, Japan's second-largest automaker by sales, would become the largest single shareholder of the much smaller Mitsubishi Motors, which admitted last month that it had supplied Nissan with mini-vehicles with overstated mileage levels.
The deal would give Nissan a bigger stake in Mitsubishi than its 15 percent holding in alliance partner Renault. The French automaker holds a 43.4 percent stake in Nissan.
The news comes just hours after Mitsubishi Motors said it had enough cash to weather the scandal and warned that non-compliant data may have been used to calculate the fuel economy for more of its cars.
Mitsubishi's market value has fallen around 42 percent or $3 billion since the scandal broke on April 20, on fears of hefty compensation costs, while sales of its mini-vehicles halved in April.
The automaker is part of the Mitsubishi business empire, or "zaibatsu", which was split up into independent companies after the Second World War.
It has strong ties with its sister companies, including Mitsubishi Heavy Industries, Mitsubishi, and the Bank of Tokyo-Mitsubishi UFJ, which together with subsidiaries hold roughly a 34 percent stake in the automaker.
Mitsubishi has admitted to overstating the fuel economy of four of its mini-vehicle models for the Japanese market - the Dayz and Dayz Roox which are marketed under Nissan's badge, and two other models under the Mitsubishi brand.
As a result, analysts estimate the automaker is facing up to $1 billion in compensation payments to its customers for 'eco-car' taxes and extra fuel costs, along with payments to Nissan over the rigged readings. Mitsubishi halted production of the four models late last month.
Making cars for Nissan has been a driver for domestic sales at Mitsubishi, whose own branded vehicles have lost market share. Japan comprises roughly 10 percent of Mitsubishi's global vehicle sales, while it is growing its presence in Asia.
Mitsubishi's latest misconduct has revived memories of a scandal more than 15 years ago when it admitted systematically covering up customer complaints for more than two decades.
Its brand image weakened, it was unable to recover on its own and received a major bailout from other Mitsubishi Group companies in 2004, after which it continued to be plagued by recall and quality issues.
- CNBC contributed to this report