The merger of Japan's Kyodo Oil Co. and Nippon Mining Co. is the first of what could become a wave of consolidation in Japan's oil industry, analysts and refinery sources here said.

Mergers are a strategy more companies could pursue to survive fierce competition in the increasingly deregulated oil market, they said.Japan's Ministry of International Trade and Industry is expected to lift restrictions on processing levels of crude oil starting in April or October this year in the next-to-last stage of its oil industry deregulation plan.

Gasoline is the most profitable oil product for refiners in Japan. Once refining limits are lifted, increased gasoline production could lead to price wars for sales and market share, which in turn would erode profitability, refiners fear.

To survive in the free market, companies need to form alliances with companies with large financial reserves, to further streamline their operations and achieve easier and cheaper access to crude oil.

Japan's fourth-largest oil company, Kyodo Oil, and fifth largest, Nippon Mining, announced Wednesday that the two will merge and set up a new oil company on Dec. 1.

The new company will be the second-largest oil company in Japan after Nippon Oil.

Kyodo Oil operates service stations all over the country, but does not own any refineries. Until the merger, it was the last purely marketing oil company in Japan.

Nippon Mining, however, operates three refineries with a total capacity of about 250,000 barrels a day, but does not have any service stations.

An industry analyst at a Japanese securities company said the merger was in preparation for the deregulation of the industry.

"Merging marketing and refining operations into one makes it safer and easier to manage business," said Noboru Suzuki at Sanyo Investment Research Institute.

Japanese oil companies "have yet to improve their profitability, but on the other hand, competition keeps on getting fiercer," Mr. Suzuki said.

Helping the process along is MITI. The ministry is aiming for a small number of strong, large companies competing in the oil market, rather than a large number of small ones, industry sources said.

More than 30 companies are involved in oil refining and marketing.

MITI wants a wholly Japanese oil company to lead the market, said an industry analyst with a foreign securities company. Therefore, it is encouraging these companies to improve their business practices and to merge, he said.

Oil companies in Japan are divided into two groups: One consists of companies wholly owned by Japanese interests, such as Kyodo Oil, Cosmo Oil, Mitsubishi Oil and Idemitsu Kosan; the other is related to foreign capital, such as Nippon Oil, partly owned by Caltex; Showa Shell, partly owned by the Royal Dutch Shell Group; and Tonen, partly owned by Esso and Mobil.

Nippon Oil Co. currently is the largest Japanese oil company, with about a 17 percent to 18 percent share in the oil market, followed by Idemitsu, Showa Shell, Kyodo and Cosmo.

MITI sees Nippon Oil's 17 percent share as being too small for the leading company, the analyst said. "The ministry wants a stronger leader."

The analyst said the ministry wants to encourage more mergers among Japanese oil companies.

Possible candidates for future mergers are refining companies within the Kyodo group, such as Kashima Oil and Fuji Oil, or Cosmo Oil, which was established after Maruzen Oil and Daikyo Oil merged in 1986.

"It is natural to think Kashima and Fuji are likely to merge (into Kyodo Oil) and make the group stronger," one analyst said.

Kyodo Oil's merger with Nippon Mining's refining interests will not immediately increase its market share of oil product sales beyond its current share of slightly less than 14 percent. But that linkup, and possible mergers with Kashima and Fuji would make it the strongest Japanese-owned oil company in the country.