PACIFIC PERSPECTIVE: SOVIET/JAPANESE TALKS : A Kinder, Gentler North Pacific? : The dispute over ownership of the Kuril Islands is complex, but settling it could help heal a long-festering wound between the two nations.

TOKYO —  At the Shimonoseki peace conference of 1895, the Chinese negotiator Li Hung-chang had a guiding philosophy in dealing with his Japanese adversaries--that it is generally better to yield to territorial demands than pay heavy reparations. Chancellor Li knew that money lost seldom returns, but territory has a way of coming back.

The long view of history may be on the verge of paying off, this time for Japan. Just as China in 1945 regained Taiwan, which it had given up at Shimonoseki, so today Japan preparesitself for the possible repossession of some or all of the islands near Hokkaido that were occupied by the Soviets in the same year.

Next week, Soviet President Mikhail S. Gorbachev is scheduled to visit Japan. The visit would be the first by a Russian or Soviet head of state. A century ago, in May, 1891, Crown Prince Nicholas of Russia (later Czar Nicholas II) came to Japan and only narrowly escaped assassination by an extremist policeman near Kyoto.

Gorbachev’s visit will represent the culmination of efforts to improve much-retarded relations between the Soviet Union and Japan. The Russo-Japanese War of 1904-05, bloody clashes on the Manchurian frontier in 1938-39, World War II and the Cold War have left open wounds, including a dispute over ownership of the islands.

The Northern Territories, as the Japanese call them, are composed of Kunashiri, Etorofu, Shikotan and the Habomai group. The real estate is known to the Soviets as part of the Russian republic’s Kuril Islands, a long chain strategically guarding the Sea of Okhotsk.

Soviet troops seized all of the Kuril Islands from Japan in early September, 1945, acting under a secret provision of the February, 1945, Yalta agreement. Soviet occupation was also pursuant to President Harry Truman’s General Order No. 1 concerning the Allied invasion.

Stalin triumphantly announced the occupation, saying that the Russian people had long awaited the day when the “stain” would be “wiped out.” Presumably, Stalin was referring to the humiliating defeat in the Russo-Japanese War. The United States immediately responded, saying it had “no objection.”

Japan must now deny that the Northern Territories are part of the Kuril Islands, because it formally renounced its claim to the Kurils in the San Francisco Peace Treaty of 1951 (which the Soviet Union refused to sign). In other words, strictly legal resolution of the territorial dispute depends on determination of what exactly comprises the Kuril Islands.

Documentary support for Japan’s irredentism derives principally from the 1855 commercial treaty between the emperor and the czar, delimiting the border between Etorofu and the Kurils to the north.

Japan further argues that Japan could not be fairly bound by Yalta, to which it was not a party and which was not a bona fide treaty under international law. Moreover, the Soviet Union had repeatedly forsworn territorial aggrandizement as a war aim, ever since it signed the 1941 Atlantic Charter.

The Soviets counter with another menu of legal arguments. They insist that Yalta is indeed binding upon Japan, because its provisions were subsumed in the July, 1945, Potsdam Proclamation, which Japan accepted in its surrender. Furthermore, Potsdam stated that Japanese sovereignty would be limited to the main islands “and such minor islands as we determine.” Stalin did not sign the proclamation, but the Soviets infer plausibly that “we” must include all of the Allies. In any case, they say, Japan surrendered unconditionally, and that must be understood literally.

The legal equities of the dispute are complex. If the case were ever taken to the International Court of Justice, the outcome would be far from certain. This should impel both sides to compromise.

An international solution appeared in the form of the 1956 U.S.S.R.-Japan Joint Declaration, a duly formed treaty. The deal was that a peace treaty would be signed after the Soviets returned the smaller islands, Shikotan and the Habomais. Nothing was said of the bigger islands, but the Japanese believe that they preserved the right to press for those territories later.

But the Soviets reneged on the deal in 1960, citing the renewal of the U.S.-Japan security treaty. Until recently, the spirit of compromise was studiously avoided by both sides. As a policy, the Soviets denied that any territorial issue existed, while the Japanese demanded the repatriation of all four islands as a matter of absolute principle.

The best hope for settlement rests in resurrecting the spirit of the 1956 compromise. It is still good law, but its details can be refined. Shikotan and the Habomais should be returned to Japan directly. Reversion could be accompanied by agreements on demilitarization, shared fishing rights and liberal citizenship terms for the current residents.

On this basis, talks could commence about the larger islands. Kunashiri and Etorofu could become jointly administered United Nations trust territories. As a concrete step in its regional security initiative, the Kremlin might offer to demilitarize the entire Kuril chain.

When Soviet Foreign Minister Alexander A. Bessmertnykh visited Tokyo last week, he looked forward to bilateral relations built on “the foundation of international law.” At a minimum, the Soviet Union should live up to its international commitment, and thereby wipe another stain from its record. This would set the stage for a kinder, gentler chapter in Soviet-Japan relations.

However, the issue may also have dangerous domestic ramifications for Gorbachev. It is a historical fact that the last Russian cession of territory to Japan triggered the 1905 revolution. Gorbachev must confront the difficulty of ceding territory to Japan while denying exit rights to the separatist republics in the Baltic and Caucasus. The Soviet military, which has stationed a division with attack helicopters on the islands, is opposed to any reversion. So, too, are most of the island residents.

Gorbachev has an opportunity to demonstrate his power, if he still possesses it, over both his left-wing rival Boris Yeltsin and the right-wing Establishment, now curiously allied in their intransigence over the Kurils.

A few weeks ago, a Soviet legislator announced that the Kremlin had agreed to sell all four islands for $200 billion. He was soon charged with slanderous treason. But it is not clear whether his mistake was to reveal the possibility of a sale or to name a specific price.

Reports in Tokyo have mentioned the possibility of loan and aid packages for the cash-hungry Soviets ranging from $10 billion to $30 billion. Indeed, Li Hung-chang’s old wisdom that money disbursed does not easily return is clearly reflected in the wariness of Japan’s government and business community about buttering the bread of the Soviets.

Whatever the economic deal, political compromise over the Kurils would bring to an end the cycle of victimization that has too long poisoned Soviet-Japanese relations.