JAPAN'S long overdue Financial System Reform Law took effect on Thursday theoretically ushering in a new era of deregulation in Tokyo's financial markets. But such is the combined effect of the recession and the Ministry of Finance's (MoF) paradoxical decision to impose restrictions on deregulation, you could be forgiven for thinking it was an April Fool's joke. ''It's no Big Bang, it's not even a whisper,'' said BZW's Investment Strategist, Ms Kathy Matsui. ''Everybody knows that everything has been put on hold while the government works day and night to get the real economy going again.'' As of April 1, the start of the new fiscal year, city banks - that is, commercial banks - trust banks, and brokerages are allowed - eventually - to engage in each other's fields of business through subsidiaries. But the banks' new securities subsidiaries are restricted to underwriting equity-linked bonds, and underwriting and trading straight bonus and cannot broker stocks. The trust subsidiaries of the brokerage, on the other hand, will be barred from handling designated money trusts in which large amounts of public funds such as postal savings and pension funds are invested. ''Fire walls'' as Chinese walls are known in Japan, will prohibit the exchange of confidential information about corporate customers, and the sharing of computer networks between parent institutions and their subsidiaries. The Industrial Bank of Japan, the Long-Term Credit Bank of Japan, and Norin Chukin Bank (the Central Bank for Agriculture and Forestry), are expected to be the first to set up securities subsidiaries, and may well have them up and running by June. Sumitomo Trust and Banking Co is also expected to be a player in the securities field by the end of the new financial year. But the major city banks, including the six largest - Dai-Ichi Kangyo, Sakura, Sumitomo, Fuji, Mitsubishi and Sanwa - are incensed that MoF has told them to wait a year, longer they fear if the recession continues, to protect the weaker brokerages from what its officials term ''excessive'' competition, as they struggle to survive on low volumes of share-trading in a falling market. With a powerful ally in Mr Tadashi Ogawa, director-general of MoF's securities bureau, the securities firms can enter the banking world immediately. Worse for the banks, they are also being barred from the corporate bond market. ''I know the securities industry is demanding slower deregulation, but city banks oppose further compromises,'' said Tsuneo Wakai, president of the Federation of Japan Bankers' Associations. But, even though the banks bemoan deregulation hedged with restrictions, it is unlikely that many would actually commit themselves in the present economic climate. ''The problem is a lot of the banks that would be in a position to enter into the securities business have not actually gone out and set them up simply because there are tight capital asset ratios and a general lack of funds have prevented them from doing so,'' said Ms Matsui. The minimum capital requirement for establishing a securities subsidiary is 10 billion yen (about HK$680 million), a daunting figure for banks already buckling under the burden of non-performing loans. Foreign companies may do a little better out of the changes - if they have the market share to survive. ''In the medium to long-term, the overall financial system will move toward reform,'' said Mr Ryuichiro Tachi, professor emeritus at Tokyo University and head of a financial reform task force. He is opposed to Article 65 of the Securities and Exchange Law which provide for the separation of the banking and securities industries. ''I believe that mutual entry should be promoted as widely as possible by abolishing Article 65. All regulations should be abolished as soon as possible.''