Despite six years of efforts to pry open Japan's financial markets, U.S. banks and securities companies still face restrictions on how much business they can do in that country, the Treasury Department told Congress yesterday.

"In general, Tokyo is viewed as a key financial center, but one in which change has not kept pace with that in other major centers. By any standard of openness, Tokyo lags substantially behind New York and London," the department said in a 505-page report to Congress on foreign treatment of U.S. financial institutions.

The report also criticized the newly industrialized economies of South Korea and Taiwan and "most major Latin American countries" for discriminating against American banks.

In an indication of a tougher Treasury line on trade issues, Undersecretary David C. Mulford hinted in a press briefing on the report that the Bush administration might support legislation calling for retaliation against closed financial markets in other countries if global free trade talks are not revived next year.

This is the first sign by a senior administration official that the United States might take a tougher line on trade disputes if the global negotiations, which collapsed last week over agricultural subsidies, are not put back on track. The administration opposed such legislation this year.

Japan could well be the target of U.S. retaliation, Mulford said. He revealed that the Bush administration has "warned" the Japanese that "with the rising concern in Congress ... they may well face some formidable body of opinion that would insist on stronger and enforced action.

"We aren't there yet, {but} we came very, very close... . And I hope the Japanese take note of that," Mulford continued.

In the Japan section of its report, the Treasury said, "Moreover, as new markets and opportunities arise in Japan, the ability of foreign firms to use their expertise and take advantage of those possibilities is frequently hampered by the incremental market opening approach Japanese authorities have adapted."

This was unusually harsh language for Treasury, which generally takes a softer line in trade disputes with Japan out of concern that tough talk could spark instability in financial markets and dry up foreign investment that the United States needs to finance its large budget deficit.

Among the practices that give Japanese banks and securities firms an unfair edge over American competitors, Mulford listed interest rate controls that act as subsidies to banks to expand into overseas markets; "underdeveloped and unattractive money markets" despite Tokyo's position with London and New York as one of the world's three major financial centers; restrictions on foreign firms entering the pension fund and investment trust management sectors; and barriers to the introduction of new financial products by foreign firms.

Mulford also attacked "the total web of Japanese security laws, foreign exchange laws and the way those laws are administered" as producing "something of a web or a screen that ensures continuation of a protectionist type of situation."

In its section on Japan, Treasury cited only "modest improvements" by the Japanese government in opening its financial markets.