The best Japanese car makers Motor Nissan and Honda Motors are understood to be exploring a a blockbuster mergersending shock waves through the global auto industry as the two rival companies seek to remain competitive on the a path to full electrification.

Nissan and Honda plan to enter negotiations for a merger, a Japanese business newspaper reports Nikkei reported overnight, citing sources close to the matter and noting that domestic pairs are expected to sign a memorandum of understanding soon. It is reported that the two companies will also seek to bring Mitsubishi Motors, in which Nissan is the largest shareholder with a 24% stake, into the deal.

The prospective link could create the third largest car group in the world by vehicle sales, with 8 million sales per year, according to Citi. This puts Nissan-Honda-Mitsubishi behind fellow Japanese automakers Toyota Motor and of Germany affected by the crisis Volkswagenrespectively.

In similar statements, Nissan and Honda neither confirmed nor denied the Nikkei report.

The merger report comes at a time when many auto giants are struggling to cope with increased global competition from larger electric vehicle makers such as Tesla and BYD of China.

Nissan and Honda before forged strategic partnership in March to collaborate on the production of key components for EVs.

Megamerger, however, is expected to face several obstacles. Analysts have expressed concern over the likelihood of political scrutiny in Japan, given the potential for job cuts if a deal is reached, while scrapping Nissan's alliance with the French automaker. Renault is considered crucial to the process.

Peter Wells, professor of business and sustainability at Cardiff Business School's Center for Automotive Industry Research, described the reported merger as a "really important" development — one that could help Nissan and Honda they combine their assets, save money on costs and create the technologies that are a necessity for the future.

"There's been a lot of speculation about Nissan's position over the last 12 months or so. It's been trying to match or balance its relationship with Renault, but it's been struggling," Wells told CNBC.Road Signs Europe"on Wednesday.

"It has been struggling in the market, it has been struggling at home, it doesn't have the right product line. There are so many warning signs, so many red flags around Nissan right now that something had to happen," he said. added. "Whether this is the answer is another question."

Nissan shares rose nearly 24% on Wednesday, lifting the brand's the best trading day in at least 40 yearsaccording to data firm FactSet. The Tokyo-listed firm's stock price is still nearly 25% lower year-to-date.

Honda shares, meanwhile, fell 3.2% in pre-market trading in New York.

Asked whether the consolidation between Nissan and Honda could emerge as a good recourse to combat competition from Chinese electric vehicle carmakers, Cardiff Business School's Wells said the deal could be characterized as "a solution traditional."

"My concern would be that maybe they've left it a bit late, that they don't have the current technology and the right setup (or) the right product to compete in their core markets," Wells said.

"For Nissan particularly, they don't fit the US market. That's their main concern, and they can't fix that very quickly," he added.

JPMorgan's Akira Kishimoto shared similar views on some of the obstacles to a prospective Nissan-Honda merger, saying "the hurdles to overcome would be high."

"At a minimum, we think Nissan needs to clarify where its particularly complex capital relationship with Renault, involving the French government, will end, and also provide details on the restructuring proposal it announced," Kishimoto said in research note published Wednesday.

"We think Honda needs to show how it will handle large investments (battery electric vehicles) and batteries in Canada," Kishimoto said.

JPMorgan said it now needs to wait for any concrete announcements from either company.

"This tie-up is not entirely unexpected because of course they announced their partnership earlier this year," Lucinda Guthrie, executive editor at Mergermarket, told CNBC's "Street Signs Europe" on Wednesday.

"Some of the reports I saw a claim that this happened as a result of Foxconn make an approach to Nissan. Now, with this particular transaction, I doubt if it will be a hard merger or if it will be more of a partnership," she added.

Apple Supplier Foxconn has approached Nissan about taking a stake, Bloomberg reported Wednesday, citing an unnamed source. The Taiwan-based company has been investing heavily in EVs in recent years. CNBC has contacted Foxconn for comment.

Echoing the latest development, Honda recently tested the water on a partnership with General Motorsearlier finally he decides to walk away.

Speculations on the consolidation between Honda and Nissan could follow a similar trajectory, Guthrie said.

"You have to keep in mind that this would have to come with the blessing of the Japanese government because there is the potential for a reduction in the workforce but then, how will the Japanese automakers compete with the low-cost vehicles from China?" Guthrie said.

Citi's Arifumi Yoshida said a merger would likely have a negative impact for Honda, but a positive one for Nissan and Mitsubishi.

"Given Honda's competitiveness in motorcycles and (hybrid electric vehicles) and the strength of its brand, we believe it is in a position to take on rivals for the next 5-10 years," Yoshida said in ' research note published Wednesday.

Yoshida however said that the decision can be seen as one made "in anticipation of the full-scale transformation of the automobile industry."

— CNBC's Michael Wayland contributed to this report.