The Asian crisis aside, Japan remains the world's second mightiest economy. Yet when it comes to investment smarts, observers say, the Japanese have lagged far behind their American and Western European peers, preferring to sock away huge savings in postal savings accounts, insurance and bonds rather than to pump their earnings into equity portfolios.

The reasons are less economic than historic: Japanese brokerage firms have proven in the past to be notoriously poor managers of mutual funds, seriously underperforming even when Japan's market was soaring. As a result, the funds never caught on.

Yet as the Travelers Group prepares to buy a 25 percent stake in Nikko, Japan's third-largest brokerage firm, for $1.6 billion, the pressures to globalize in the financial services industry are beginning to make a mockery of traditional assumptions.

Before Salomon Smith Barney made its move, Merrill Lynch & Co. already had announced plans to launch a brokerage business in Japan. Merrill's business will employ hundreds of workers hired from the now-defunct Yamaichi Securities, Japan's fourth-largest brokerage firm until it succumbed to heavy debt earlier this year.

Goldman Sachs & Co. Inc. also has operations in Japan. For Nikko, already reeling from hundreds of millions of dollars in losses last year, Salomon may provide just the financial fillip it was seeking to spare it from Yamaichi's fate.

Plus, the moment is ripe for Nikko as Japan seeks to jump-start its economy with a package of economic stimulus measures, James Fiorillo, a Tokyo-based analyst for ING Barings, noted.

"Nikko found that they are going to need a second round of capital for strategic and technological investments going forward under Big Bang deregulation, and I think they found themselves wanting," Fiorillo said.

"They realized that if they are going to survive the competitive shakeout over the next couple of years, they're going to have to find a bigger partner," Fiorillo added.

Paul Fraker, a portfolio manager at Brown Brothers Harriman, said the paltry historical performance of mutual funds in Japan leaves "tremendous scope" for improvement.

Fraker cited statistics from a recent Nikkei newsletter suggesting that attitudes towards mutual funds are changing rapidly. In the past year alone, the figures show, the net assets of overseas managers have quadrupled to 2.36 trillion yen ($170.2 billion).

Perhaps more surprisingly, non-Japanese fund managers over the period took in 381 billion yen ($2.78 billion), as compared to 283 billion yen ($2.04 billion) for native managers, marking the first time that overseas fund managers recorded larger intakes than their Japanese counterparts.

The market share of mutual funds also mushroomed in the 12-month period through May, from 1 percent to 5.3 percent of total investments.

Fraker attributes what he called a "rush" of Japanese towards mutual funds in April to two primary factors: a recent relaxation on restrictions in the foreign exchange law, and changes in the law regulating management of pension money in Japan.

What we're seeing, Fraker said is "a whole business culture change. … The risk-aversion should go down."

Vincent McBride, an international strategist at Warburg Pincus, which manages two growing mutual funds in Japan, agreed. McBride cautioned that changing an investment culture requires patience. But he expressed confidence that the combination of knowledgeable local brokers and strong management would reap rewards.

"Mutual funds aren't huge right now, but the ones that have existed have been terrible," McBride said. That is why, he added, a partnership between Salomon Smith Barney and Nikko Securities will work "if they're going to go in there and manage things on a reasonable basis."
    --By staff writer Douglas Herbert