The Threat of Cheap Japanese Money : THE SECOND WAVE Japan’s Global Assault on Financial Services <i> by Richard W. Wright and Gunter A. Pauli (St. Martin’s Press: $19.95; 139 pp.) </i>

It was not so long ago--10 years at the most--that the giant American commercial banks, Citicorp, Chase Manhattan, Bank of America and others, spread their operations throughout the world and aroused fears that they would dominate global finance.

But today such fears seem ironic as the American banks, some of them struggling merely to survive, have lost pride of place to the banks of Japan. Of the world’s 10 largest banks, seven now are Japanese. Only one U.S. bank, Citicorp, clings to a place (9th) among the top 10.

The Japanese also have fallen heir to the fears that used to be directed at the Americans. With five of the 10 largest banks in California now Japanese owned, and with Japanese companies building factories all across the country, Americans are beginning to see hobgoblins. “Our kids will be slaves to foreign interests,” one U.S. labor official said recently, without any sense that he was overstating for effect.

This book doesn’t support such hyperbole, but it does argue that fears of Japanese banks and brokerage houses dominating world financial markets are well founded. The authors, a professor of finance at Montreal’s McGill University and a European management consultant, write that “the Japanese have launched their Second Wave of competition,” aimed at achieving in banking and investment services the kind of victories their industries scored earlier in cars and television sets.

The book’s own achievement is its brief and clear explanation of the growth of the Japanese banks as they furnished the capital for Japanese business in the postwar period. Japan was a tightly interlinked system with banks and companies forming close relationships and the government supporting and regulating it all, seeing that industry had ample supplies of low-cost capital.

But now things are changing. The companies and banks have an abundance of money because huge investments are no longer needed inside Japan. “It used to be that the most efficient and high-yielding investment was in the factories and infrastructure required to create the economic powerhouse Japan has become,” write the authors, “but that is no longer the case. The best opportunities now lie elsewhere.”

And to seize those opportunities, Japan’s banks and finance houses start with an edge its manufacturers did not have--what the authors term “a comparative advantage in a commodity even more important than oil: money.”

They are making their presence felt. The worldwide business in letters of credit--the assurance of financing that underlies world trade--has all but fallen to the Japanese. Why? Because they do the business at a commission rate that is unprofitable for American banks, a U.S. banker explains. And so, frequently, the U.S. banks drop letters of credit--much in the way their manufacturing counterparts dropped TV sets and machine tools in the last decade, when “low-priced” Japanese goods flooded the market.

But what was a serious loss then could be a crucial failure now, because finance could be more important to a nation’s competitive well-being than heavy industry ever was. The power to lend is the power to control who gets capital and who does not, after all. Dominance of financial services gives the holder potential power over all industry.

So it behooves the United States and Europe to retain and strengthen their own financial institutions. How? The book’s suggestions are a bit routine and naive: Banks should make alliances to share high-profit services; should “attend to needs of employees and customers.” The authors distrust the idea of giant mergers, but the fact is mergers to create financial institutions with heft in world markets are a probable response to the competitive challenge from Japan.

The book has other flaws. On the one hand, it falls victim to a defeatist mentality that sees the game as lost as soon as Japanese companies step on the field. But it seems more realistic to expect that Japanese banks, venturing into world markets from a closed and regulated domestic system, will encounter problems as did the American banks that went before them.

On the other hand, the book paints Japanese business as an unvarying and somewhat malevolent attacker whose every action has an ulterior motive--including the research that Japanese companies finance at U.S. universities.

The truth is more complex than demonology. It is that the world’s financial markets are changing and growing at a pace that the nation states of America, Asia and Europe scarcely understand, much less control. Reacting out of fear to such a process gets us nowhere. Happily, “The Second Wave,” at its best, is a help to understanding.