Hitachi, Sony and Toshiba are planning a joint venture to make small and medium-sized LCD displays for tablet PCs and smartphones.
The new company will be operated by Innovation Network Corporation of Japan (INCJ), a government-backed firm set up to promote innovation in Japan.
The companies hope to have integrated the businesses by early 2012.
INCJ will eventually hold 70% of the shares in the new company, with its three partners holding 10% each.
The companies have signed a memorandum of understanding, which is not currently binding. They hope to sign legally binding agreements later this year.
INCJ, which is 90% government-owned, will eventually invest 200bn yen ($2.6bn; �1.6bn) in the venture, which will overtake Sharp and Samsung to be the world's biggest manufacturer of small and medium LCD displays.
Hitachi, Sony and Toshiba have hesitated to make big investments in the LCD business because of competition for South Korea and Japan and expectations that prices are likely to fall.
"We will probably see oversupply in the near future," said Shigeo Sugawara from Sompo Japan Nippon Koa Asset Management.
"It's not a business that will likely provide stable profits in the mid to long term."
Sharp is about to receive a $1bn investment from Apple.
There are concerns that while Toshiba, Sony and Hitachi have 21.5% of the small and medium LCD display business between them, they use different types of display technology, which will make it difficult to combine the businesses.
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