The Password system does nothing special besides transfere over perimeter states based on your characters level in Budokai 3. It don't actually transfere over Budokai 3 characters. So getting a characters' stats maxed out is all it's good for. I find the password system a little useless, it don't do much, and nothing really changed at all with it; also not to mention the fact that it can only be used in one fighting mode.
Yawn - what is there to say?