System profile parameter login/password_downwards_compatibility governs the compatibility of newer security features in the password one-way hashing mechanisms. For new systems which can be expected to be communicated with from other ABAP systems which are still in mainstream support, the older hashing mechanisms should not be required. As a workaround, the password rules can still be set such that a CAPS-ON 8 character password is not rejected, if required. It would be nice if the default value were 0, and the system therefore only generated the new PASSCODE and not the BCODE as well. Customers who wish to enable downward compatibility including the hashes can still change the static profile if they wish but it needs an active decision to do so. This is easier than retro-fitting the new password rules for all others and changing dynamic parameters until it finally (and hopefully) works when switching to 0 only.
Update: Please see the comments by Wolfgang Janzen. Related notes will be added when available.