Shares of Japanese automaker Honda jumped more than 16% on Tuesday after the company announced a buyback of up to 1.1 trillion yen ($7 billion) the previous day.

The buyback announcement came as Honda and its struggling rival Nissan agreed on Monday to launch talks on a merger seen as a bid to catch up with Chinese companies and Tesla on electric vehicles.

Honda will buy back its shares worth up to 1.1 trillion yen, or 23.7% of the total issued shares, to improve the "efficiency of its capital structure," the company said on Monday.

"Even with this amount, we are still a little short as an equity ratio adjustment, but we will start with the largest share buyback we can do at the moment," Honda CEO Toshihiro Mibe told reporters.

"But even if we go that far, we still have a sufficiently strong financial base," he said.

The collaboration between Honda and Nissan would create the world's third-largest automaker, expanding the development of EVs and self-driving tech.

Honda's CEO insisted that it was not a bailout for Nissan, which announced thousands of job cuts last month and reported a 93% plunge in first-half net profit.

Lackluster consumer spending and stiff competition in several markets are making life hard for many automakers.

Business has been especially tough for foreign brands in China, where EV manufacturers such as BYD are leading the way as demand grows for less polluting vehicles.

The two firms, along with Mitsubishi Motors, of which Nissan is a majority shareholder, said they had signed a memorandum of understanding to start discussions on integrating their business under a new holding company.