TOKYO, June 7 (Reuters) - Japan's two biggest banks will start divesting their strategic shareholdings in Toyota Motor - worth a combined $8.5 billion - and will seek to sell into the automaker's planned share buybacks, Bloomberg News reported on Friday, citing sources.

Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG) have said they plan to sell down their cross-shareholdings over time. They declined to comment on the report.

The unwinding of shareholdings by the banks in Toyota, one of Japan's most prestigious companies, would underscore how corporate governance reforms are increasingly taking root amid pressure from the government and the Tokyo Stock Exchange.

Japanese companies have long used cross-shareholdings to cement business ties but the practice has been criticized as a way to shield management from activist or hostile shareholders.

The country's governance code now requires companies to annually assess whether the purpose of a cross-shareholding is appropriate.

The banks' holdings in Toyota would be sold over a period of several years, Bloomberg said.

Toyota did not immediately respond to a request for comment.

Japan's largest automaker said last month it planned to buy back up to 410 million shares worth 1 trillion yen ($6.4 billion) by the end of April 2025.

Toyota shares were down 2.0% in afternoon trade, falling on the report. The banks' shares showed little reaction.

($1 = 155.5300 yen)

(Reporting by Kantaro Komiya, Anton Bridge and Daniel Leussink; Editing by Edwina Gibbs)