The last days of 1995 had a flavor of deja vu all over again for the world's banking industry: Just as the Resolution Trust Corp. finally phased out, Japan's Ministry of Finance announced the formation of a similar entity, the Jusen Resolution Organization, to deal with the mountain of bad debts incurred by the nation's eight housing loan banks.

It is destined to be a noisy spring in Japan as an outraged public demands accountability for the losses, and banks and insurance companies with share holdings in the Jusen expect to be targets of shareholder suits, a recent import from the U.S. legal system. The noise will be magnified by this year's Japanese electoral politics.

America should take note, however, that beneath all the fury and recriminations a profound if far more subtle revolution is under way in the overall structure of the mainstream commercial banks in Japan that will have tremendous impact on the U.S. financial services industry.

What most view as an overwhelming debt crisis crippling Japan's huge - but slow and conformist - banking system is more likely to produce a streamlined and innovative banking industry eager and able to challenge America's dominance in the global market.

Japanese banks are not down for the count. Instead, the current upheaval is similar to the series of U.S. banking crises in the 1980s, which laid the groundwork for a far more resilient and competitive American banking system.

The Daiwa debacle was, in fact, a blessing in disguise for Japan: a timely impetus for much-needed revolution in the country's protected and complacent financial services industry.

On Dec. 22, Japan's Financial System Stabilization Committee - an advisory organization to the Ministry of Finance charged with developing a comprehensive plan for dealing with the bad-debt problem - called for the Ministry of Finance to officially abandon its policy of guarding the business affairs of the banks by switching to a policy of objective regulatory oversight.

A few days later, the minister of finance outlined new reforms that will force banks to operate along more competitive lines subject to greater disclosure and reporting.

In Japanese terms, these announcements amounted to a revolution. The committee's recommendation effectively repudiated the antiquated and stifling "convoy system" that has governed Japanese banking for almost a century.

The convoy system, like the naval strategy which calls for vessels with differing capabilities to travel in close formation at the speed of the slowest ship for the safety of the entire fleet, has its origins in the late 19th century, when Japan felt that the outside world was too dangerous and Japanese enterprises and institutions were too fragile to allow much competition within Japan. In modern times, this has meant that all Japanese banks offer essentially the same financial products and services at the same prices.

Thus, for the first time, the growing legion of informed and influential insiders willing to recognize that the convoy must be scrapped had their views put forward as a public policy recommendation.

If it can be sustained, this victory of the reform party signals the broader defeat of the established forces of the old "iron triangle" of bureaucrats, senior corporate executives, and bankers, and their political allies - who believe that with adjustments at the margin the post-cold-war system for a "managed market" economy can be preserved.

The reform-minded members of this same elite believe that Japan must become a more efficient and equitable modern market economy in order to maintain its place in the global economy.

The series of embarrassing incidents last summer and fall (Hyogo, Cosmo, Kizu, and Daiwa) has clearly tipped the scales toward those forces that favor systematic reform. Japan's reformers argue that the antiquated banking system should be replaced by "cautious Darwinism," which would accelerate regulatory liberalization based on clearly understood rules of the game within which banks will compete on distinctive competencies or skills - that is, the ability to add value.

Cracks in Japan's keiretsu system are already emerging from the inability of the "main banks" to add value beyond providing simple credit. Recently, Japanese companies refused to accept higher banking rates imposed through a "Japan" premium from their affiliated banks.

The last time a premium was imposed, in 1977, it was accepted without significant protest. If the reformers win the day, Japanese banks will likely begin to specialize, requiring companies from other keiretsus to break free of old alliances.

While leading Japanese banks are already intently studying the lessons of banking systems abroad, especially in the United States, to become more skill-based, they will not blindly mimic U.S. practices or strategy.

Despite the calls from some quarters to emulate the Bank of Tokyo/Mitsubishi merger - which has unique synergies - to form global superbanks, most of the industry will repudiate the United States' tendency to look toward sheer scale through mergers and acquisitions to improve competitiveness.

Japan realizes that size does not translate directly into effectiveness. Above all, Japanese society would not accept the cost savings through staff downsizing that is the key benefit of U.S. bank mergers.

Japan's banks are also acutely aware of the operational and market risks involved in mergers and the cost and complexity of coordinating activity in the resulting institutions.

They recognize that many of the success stories of U.S. banking since 1980 have conspicuously avoided major mergers, concentrating instead on developing cutting-edge skills in specific financial disciplines.

For example, J.P. Morgan, through intense focus on the changing requirements of its core clients, developed the capital markets, treasury capabilities, and services required to maintain their traditional relationships and, in the process, became the one U.S. commercial bank to succeed in becoming a competitive global investment bank.

This is not to say that mergers will not take place. Rather, Japan's best-managed banks will focus on improving their skills in risk management and creating and delivering high value added financial products in a variety of market segments.

The challenge to U.S. firms will not arise from a few giant Japanese banks, but from innovative banks more specialized in discrete business areas, better able to manage and measure risk and eager to compete in the global market by offering a plethora of new financial products and services which will better respond to their customers' needs.

The good news for America's financial services industry is that even the best Japanese banks will need several years to reinvent and test themselves in their own market before making significant inroads in the global market, allowing America's financial services industry a window of opportunity in which to exploit the turmoil in Japan's banking system.

How should American banks take advantage of this opportunity? Here's some advice:

Acquire a Japanese bank. Until now, the acquisition of a Japanese bank by a foreign company was unthinkable. The Japanese authorities now recognize that foreign institutions will doubtlessly play a bigger role in Japanese finance to take up the slack if the economy picks up ahead of Japanese banks repairing their balance sheets.

With the traditional keiretsu in retreat, now is the time for U.S. financial institutions to take advantage of this unprecedented opportunity. The consumer banking market is growing rapidly in Japan. Adeptly transposing American products and expertise into indigenous Japanese banks can effectively and profitably service this market.

Aggressively introduce new products and services. U.S. financial services firms operating in Japan should take advantage of the unprecedented commitments made by the Japanese government in last February to take measures that will increase access and enhance transparency in the regulation of financial activity. Now that the Japanese regulators have agreed to go by the "rule of the law," it's up to U.S. players to test their resolve by attempting to introduce new financial products.

History shows that all banking systems experience discontinuous, not evolutionary, change, with credit crisis merely acting as a symptom of institutional and regulatory inertia failing to stem the fundamental forces at work. These forces inevitably transform all banking systems along similar lines, but the level and duration of change vary greatly with national circumstances.

Now that the formidable resistance to reform is cracking in Japan, American and Japanese financial institutions that view the crisis as an opportunity to change the game can emerge in a significantly more powerful position.

Mr. Mellyn is a partner with Mitchell Madison Group, New York, a consulting firm that advises clients in global business. Mr. Mitchell, a specialist in international finance, is head of the Pacific practice group at the law firm of Chadbourne & Parke, New York.

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