UPDATE 1-Taiwan says Japan to invest in Taiwan's TMC

* Japan government to invest no less than Taiwan government

* TMC to finish proposal to ask for Taiwan government funds

* Taiwan's TMC in talks with 5-10 investors

(Adds details, quotes)

By Lee Chyen Yee and Argin Chang

TAIPEI, June 6 (Reuters) - The Japanese government will invest in the new computer memory chip firm set up by the Taiwanese government to overhaul the DRAM sector, undergoing its worst downturn, Taiwan's economics minister said on Saturday.

The move will allow DRAM companies in Taiwan and Japan to compete with the world's biggest players, Samsung Electronics (005930.KS) and Hynix (000660.KS) of South Korea, as the industry suffers from an oversupply and narrow margins.

"The Japanese know they can't do it alone," said Kenneth Lee, a vice president at Taiwan's Fubon Securities Investment Trust.

"They can't compete with the Taiwanese and the South Koreans in terms of operations and efficiency, so they need to find partners to collaborate with."

Taiwan Economics Minister Yiin Chii-ming told Reuters the Japanese government will invest in Taiwan Memory Company (TMC), but he did not provide details. Officials at Japan's Ministry of Economy, Trade and Industry were unavailable for comment.

The Central News Agency backed by the Taiwan government said the Japanese government will invest in TMC no less than its Taiwan counterpart in terms of the dollar amount.

"The business plan will be completed soon," Yiin said, adding that the company will then apply for funds from the National Development Fund under the Taiwan government.

Besides waiting for government money, TMC was also talking to five to 10 potential investors at home and overseas, Yiin said.

The Taiwan government would invest no more than T$10 billion ($300 million) to take a stake of less than 50 percent in TMC, which picked Japan's Elpida (6665.T) as a technology partner, government and industry officials said earlier this year.

Taiwan's dynamic random access memory makers (DRAM), such as Powerchip (5346.TWO) and Nanya Technology (2408.TW), have been bleeding losses for most of the past year due to oversupply, with the dire situation exacerbated by the global crisis. [ID:nSEO316971]

ProMOS (5387.TWO), which ranks No. 3 in Taiwan behind Powerchip and Nanya, has been struggling to get enough funds to help pay off its convertible bonds and for its working capital. [ID:nTP325315]

The reshaped industry might help Taiwanese suppliers, which make nearly a quarter of all the world's DRAM memory chips that are widely used in personal computers, get a stronger grip on output.

On Saturday, Powerchip's stock closed 2.2 percent lower and Nanya's shares were down 0.33 percent, underperforming the main TAIEX index's 1.3 percent rise.

Taiwan markets were open on Saturday to compensate for an extra holiday last week for the Dragon Boat Festival.

(Editing by Keiron Henderson)