TOKYO, Oct 21 (Reuters) - Japanese furniture retailer Nitori Holdings Co said on Wednesday it may bid for Shimachu Co, threatening a plan for the home improvement retailer to be bought by its bigger rival DCM Holdings Co in $1.6 billion deal.

In a move that could complicate the bidding, a prominent activist investor on Wednesday revealed its ownership of 8.38% stake in Shimachu, saying that the offer price by DCM might be cheap.

"We have not seen any signs of Shimachu trying to seek bidders that would maximize the shareholders value," City Index Eleventh Co, a fund backed by veteran activist investor Yoshiaki Murakami, said in a statement.

DCM's tender offer, which values Shimachu at 164 billion yen ($1.6 billion), is due to run until Nov. 16 and has the support of Shimachu's management.

Nitori's possible bid and the involvement of the Murakami-backed fund could become another test case for Japanese corporate governance, which has been improving as boards come under pressure to give investors higher returns.

Placing a bid without consent from a target has been a long taboo in Japanese corporate culture but in recent years the number of such bids has been on the rise and welcomed as they could unlock corporate value.

A hostile bid by a travel agent H.I.S. Co to buy hotel operator Unizo Holdings last year was a typical example. Though the H.I.S. bid eventually failed, it prompted global foreign investment groups to place competing bids, helping the shares surge.

News of the possible bid by Nitori sent shares in Shimachu surging 14.5% to close at 4,805 yen, well above DCM's offer price of 4,200 yen and valuing the company at 205 billion yen.

Shimachu said it had not received a proposal from Nitori.

A DCM spokesman said the company would continue with its tender offer as planned, declining to comment on Nitori's announcement. DCM's shares plunged 6.8%.

A bid by Nitori, which sells a range of products from furniture to kitchen tools at affordable prices, highlights efforts by retailers to grow as the coronavirus pandemic slows consumption.

"We are considering possibilities for growth through mergers and acquisitions, including Shimachu," Nitori said in a statement.

Nitori's shares fell 1.63% while the wider market edged 0.3% higher.

($1 = 105.3800 yen) (Reporting by Chang-Ran Kim and Junko Fujita; Editing by Gerry Doyle and Jason Neely)