(FORTUNE Magazine) – Given the steady drumbeat of bad news coming out of Japan these days, you might expect to hear a lot of voices crying for radical change. Instead what you all too often get are arguments for the status quo from people like Kentaro Aikawa, the chairman of Mitsubishi Heavy Industries. In a mid-January interview he told Nikkei Sangyo Shimbun, an industrial daily, that "we'll be in trouble if the theories of Harvard Business School are brought to Japan.... I have always said that Mitsubishi management values jobs before profit. Lately, I've become surer than ever that this thinking is correct. We don't give a hoot about things like return on equity."

After all, Aikawa added, "it is essential that our business practices take social effects into consideration." When told that in America shareholders would complain about such a strategy, Aikawa responded, "That's why I openly brag that I don't cater to shareholders.... We don't need to advertise to get foreigners to buy our shares. If shareholders don't like us, they should hurry up and get rid of us."

It is all there: the commitment to workers and the indifference to shareholders, the concern with broader social goals and the xenophobia. To many minds, these are the qualities that define the Japanese corporate model. And it is true that they remain largely predominant, which is the main reason that--measured by the corporate sector's return on equity--Japan in the mid-1990s was the rich world's most inefficient deployer of capital.

Yet despite this entrenched conservatism, despite the government's miserable recent record of fiscal and monetary management, and despite widespread doubt that Japan is really changing (see following story), a corporate revolution is under way that by early next century will have radically remade the business culture of Japan--mostly in America's image.

What lies behind this as yet mostly invisible transformation? Shinichi Ueyama, a consultant in McKinsey's Tokyo office, points to a gradual accumulation of pressures:

--Japan is slowly but inevitably opening up its financial sector. Merrill Lynch, for example, is now aggressively expanding into the retail brokerage business.

--Eight years of poor stock market performance has begun to make all but the most hidebound managers think more about the level of their share price. Companies like Hoya, an optics firm, are adopting cost-of-capital measurements to boost shareholder wealth.

--Over the past decade, Japan's bureaucrats have been constantly (if slowly) deregulating markets as well as dropping some price controls. Mobil, for instance, is shaking up the rules of Japan's retail gasoline industry.

--Squeezed by declining world prices for all sorts of products, Japanese companies like stereo maker Aiwa are looking for new ways to shed costs. One target: the rigid labor system exemplified by the lifetime-employment ideal.

Is all this change for real? In the past Japan has promised to reform its system only to back off as soon as it seemed safe to do so. But this time could be different. The Asian crisis is having such a profound effect on Japan that you could argue there's no turning back. Throughout the 1990s, Japan has been investing heavily in the rest of Asia. Now many of its companies need to change fast, or they will suffer badly. An early sign of their exposure came on the last day of February, when Daido Concrete, Japan's second-biggest maker of building materials, was forced into bankruptcy after its Asian subsidiaries could not service their loans from Japanese banks.

Akio Mikuni, who set up Japan's first independent credit-rating agency in the 1980s in the teeth of finance ministry opposition (he was told credit ratings were "un-Japanese"), agrees that a big shift is in the offing, one that will come "when the pressure from the magma of contradictions in Japan's economic and financial systems explodes into view." Mikuni reckons the result will be spectacular: "In the coming few years, 10% of Japan's public companies--some 300 companies, including ten to 15 banks--will either fail or be taken over."

The response to these cumulative pressures has begun to split corporate Japan into two camps. The resisters tend, like Mitsubishi Heavy Industry, to be large firms in well-established old businesses with not much need or liking for foreign markets or methods. Commercial banking, construction, and large commodity businesses like steel, paper, and cement are prime examples. The adapters, by contrast, tend to be in faster-moving businesses and--crucially--are much more internationalized in their markets and outlook. Ueyama points out that the CEO of every reform-minded company--Sony, Toyota, Toshiba, and Nomura Securities--has had overseas experience. These firms also tend to attract overseas shareholders. Some 40% of Sony's shares, for instance, are now held by foreigners. The Tokyo stock exchange has already given its verdict on the two camps. The shares of the reformists have been rising steadily, while those of the resisters--notably in construction, finance, and heavy industry --have helped drag down the market.

Critics argue that Japan's hidebound corporate standards--everything from lifetime employment to a focus on market share over profits--often prevent a company from being a truly global competitor. One company bucking that trend is Aiwa, which is in the low-end consumer electronics business making stereos, televisions, and the like. Aiwa, half-owned by Sony but with a separate stock market listing, almost went bust in the late 1980s when the yen rose sharply following the Plaza Accord of 1985. Aiwa responded in a very un-Japanese way by massively shifting overseas its production, 90% of which was then in Japan. To a chorus of media abuse, Aiwa relied on early retirement to cut 1,300 of the 3,600 jobs it then had in Japan. Today 90% of Aiwa's output is made overseas, overwhelmingly in Asia; three-quarters of the staff are employed abroad, and 88% of its sales are made there. Instead of blindly pursuing market share, Aiwa's managers specifically target ROE. The shift has worked. On sales of $2.7 billion in fiscal 1997, Aiwa made a return on equity of some 11%--around twice that of its nearest Japanese competitor.

If more Japanese companies are going to become globally competitive, they'll also need to adopt more sophisticated financial management practices. One great example of this is Hoya, a Tokyo high-tech optics company with sales last fiscal year of $1.6 billion. Its chairman, Tetsuo Suzuki, is a white-haired 73-year-old engineer who is reminiscent of Akio Morita, Sony's founder, in more than just looks. Like Morita in his day, Suzuki is considered a rebel by the corporate establishment. He is one of Japan's most outspoken advocates of the view that companies exist to increase shareholder value. Suzuki says traditional Japanese management style and objectives, which he describes as based on the notion that shareholders are somehow "people outside the company," are "flatly wrong."

Hoya, which was founded some 50 years ago to make crystal products and later moved into eyeglasses, computer disks, and laser surgery instruments, was badly hurt by the bursting of Japan's bubble economy in 1990. First Suzuki cut off unprofitable operations, sold noncore assets such as real estate, and shifted some operations overseas. Employment in Japan fell from 5,200 in 1993 to 4,000 last year, while overseas it grew in the same years from 3,800 to 5,550.

Behind these moves is a relentless drive to raise shareholder value and satisfy what Suzuki calls "the logic of the market" and in particular the expectations of the 20% of his shareholders who are foreigners. Until the mid-1990s Hoya focused on raising ROE and dividends, but Suzuki concluded that did not go far enough. The firm now aims within five years to double its version of "economic value added," which measures how much its business earns over the true cost of its capital. "I don't really care whether sales increase or decrease," says Suzuki.

Yet even if there are hundreds of Japanese companies like Aiwa and Hoya, they amount at present to no more than a few dots on the vast landscape of corporate Japan. What reason is there to think that the urge to reform will move beyond the mavericks to the mainstream? The answer to the question is twofold: the coming shakeup in Japanese finance and a surprisingly wide-ranging and subversive program of deregulation.

Finance has been the linchpin of the Japanese system of low-return, high-stability capitalism. If Japan's financial system changes significantly, so will the anti-shareholder attitudes of Japanese companies. Its ballyhooed financial "big bang," which begins in earnest on April 1 with the abolition of all foreign-exchange controls and is supposed to end in 2001 with a financial system as free as Britain's after that country's eponymous 1980s reforms, should ignite such a revolution.

In some sense, the shakeup of Japanese finance has already begun. Following a clutch of spectacular bank and securities house failures late last year, a wave of reorganizations has hit the industry. The Long-Term Credit Bank of Japan, a member of the stodgiest class of Japanese financial institutions, announced in February that this spring it will start carrying out a plan to cut the size of its board of directors by two-thirds and its whole staff by 20%, with a projected annual savings of some $1.6 billion. Around the same time Junichi Ujie, the new CEO of Nomura Securities, called into question one of the sacred principles of modern Japanese finance, the cross-shareholding system, blithely saying on a visit to London that Nomura was "seriously considering" ways to dump part of its huge portfolio of bank shares. Using language that's hard to imagine coming from the mouth of, say, the chairman of Mitsubishi Heavy, Ujie explained, "We have a bunch of bank shares. Is this really a strategic portfolio for an investment bank? I kind of doubt it."

Meanwhile, foreign penetration of Japan's financial industry is rising fast. Fidelity Investments opened offices with three Japanese banks to start joint sales of mutual funds. Citibank is fast grabbing market share in retail banking, particularly among the young and trendy. GE Capital recently announced a joint venture operation with otherwise moribund Toho Mutual Life. And in what may be the most significant foreign move of all, Merrill Lynch has plunged into retail brokerage by acquiring a branch network and 2,000 brokers from the now defunct Yamaichi Securities, Japan's former fourth-biggest brokerage.

If the big bang works as intended, it will also help turn the rest of Japan Inc. upside down. In the past Japan's banks were happy to lend to corporations at low interest rates if that's what it took to keep Japan Inc. healthy. With cheap money Japanese corporations could easily afford to produce low returns on capital, offer lifetime employment, and pursue the market share mentality. But the big bang will change that equation. Over the next few years Western financial firms should steal a bigger and bigger share of Japan's vast store of savings from the traditional banks. Many observers reckon that these Western firms may own as much as 30% of Japanese financial assets within five years, up from almost nothing today, as Japan's savers are attracted to higher-yielding bonds and mutual funds. At that point it will be impossible for Japanese corporations to ignore the demands of the big pension funds and insurance companies and others for higher returns than they have been accustomed to deliver. At that point the old way of doing business will start to disappear.

The drive for higher shareholder returns will be given another push by Japan's move toward deregulation. Over the past few years Japan has slowly begun to free up industries, from distribution, transport, and telecom to housing, labor, land markets, and health care.

The simplest and perhaps most radical example of what a couple of rule changes can do comes from the gasoline-retailing industry. In 1996, under the guise of an adjustment aimed at rebalancing prices between gasoline and hitherto subsidized kerosene and distillate, imports and exports of refined petroleum products were freed and prices decontrolled. The result has been spectacular.

Ian Scoble, an Australian who runs Mobil's Japanese operations, explains that gasoline retailing in Japan used to be "regulated, comfortable, and lucrative." Everybody made money on gasoline, and as a result gas stations proliferated, service was lavish, and productivity was low. The country's 60,000 service stations pumped only a quarter to a third as much gas as their American counterparts but did so at gross profit margins five to seven times as high. No wonder they could afford seven uniformed attendants at the average station.

In the less than two years since deregulation, gasoline prices have fallen and margins have collapsed by half, to a mere two to three times their level in America. Scoble guesses that within three years, the number of both oil companies (now 11) and gas stations will have halved. Of those that survive, the majority will have some connection to a Western oil firm.

It is too early to say whether the gas-retailing model of deregulation will spread so far and fast into Japanese business that the country will be transformed. After all, the real obstacle to reform in Japan, argues Yoshiro Miwa, who chairs a government committee pushing deregulation, is not the much maligned bureaucracy but the power of special-interest industrial lobbies that through bribes and otherwise have members of parliament in their pockets. But it would also be too cynical to reject the possibility. In Miwa's words, "The people and the media are too pessimistic about the future of this country."