Worst Case Scenario

Japan's Ministry of Trade occupies a 17-story granite tower in the heart of Tokyo's political district. The building looks as sturdy as ever. The bureaucrats inside are still recording trade surpluses with the rest of the world, month after month after month. This is the powerful agency--known as MITI, or the Ministry of International Trade and Industry--that two decades ago provoked fear and loathing in Washington because it was masterminding a protectionist and predatory strategy that vaulted Japan to the summit of the world's economies. Or so it was thought. But that era of Japan bashing has been made irrelevant by stuff nobody had heard of then, like portals and dotcoms and e-business software.

The interior of the ministry is still outfitted partly with rotary-dial phones. And typewriters. Bells chime every workday at 3 p.m. to remind employees to do their calisthenics. Small things, of course, but they are signs that while the U.S. zipped along a new technological path in the 1990s, Japan was stuck in a slow-motion devolution from economic miracle to financial debacle, doing things the old way by subsidizing money-losing industries. "I used to be asked quite a lot to give advice to Americans, to explain our success," says Ryozo Hayashi, a vice minister. "But it's been a long time since Japan was seen as a rising sun."

Setting sun is more like it. The stock markets plummeted last week to depths Japan hasn't seen since 1984. By the end of this month, total government public debt will top $5.5 trillion, a head-spinning 130% of GDP. (America's $3.4 trillion in federal public debt is 35% of GDP.) "Japan's public finances are very near collapsing," Finance Minister Kiichi Miyazawa said in uncharacteristically blunt remarks on March 8. He wouldn't say he was trying to drive down the price of the yen, but that's exactly what happened. The next day he backtracked.

While the economy appears close to imploding, the political machinery is grinding to a halt. Prime Minister Yoshiro Mori, who plans to meet President Bush in Washington this week, has overseen a scandal-ridden administration. His political colleagues are maneuvering to replace him within a month. Bush, meanwhile, has promised to treat Japan less as a pupil and more as an equal, which sounds diplomatic but not perhaps helpful. "They're going to have to figure out for themselves what to do," Treasury Secretary Paul O'Neill told MONEY magazine.

If Japan is suddenly registering on Washington's radar screen again, it's because a Japan in free fall coupled with a U.S. slowdown could imperil the world's economy. A deflated yen, already at 20-month lows, could tilt the trade imbalance further in Japan's favor. And the noise of a bursting stock-market bubble heard across the U.S. last week sounded eerily similar to what Japan experienced a decade ago. "It wasn't a miracle for Japan in the 1980s," says Tadashi Nakamae, an economist who co-authored the alarmist tome Wake Up, Japan! "And it wasn't a miracle for the U.S. in the 1990s either."