Over the past quarter century, global perceptions of Japan have fluctuated violently. In the 1980s, the country was touted as an emerging superpower that would rival the United States. Then a Lost Decade of recession and deflation eclipsed the Rising Sun, and outsiders dismissed Japan as a basket case. The Japanese economy rebounded under Prime Minister Junichiro Koizumi, a conservative who held office from 2001 to 2006, during which time we heard warnings about a resurgence of right-wing nationalism. Such fears were overblown, though Koizumi’s successor, Shinzo Abe, did not help matters by trying to sugarcoat Japan’s practice of sex slavery during World War II. Abe’s tenure was plagued by scandal and ended with his abrupt resignation in September 2007.

Today, Japanese declinism is back in vogue. The economy has plunged into its worst downturn of the post-war era, and a severe demographic crunch looms on the horizon. Japan has a remarkably low birth rate and minuscule levels of immigration. Many countries are getting grayer, but none quite so rapidly as Japan. Its population is projected to shrink dramatically by 2050. As Jeff Kingston writes in his 2004 book, Japan’s Quiet Transformation, “Japan’s demographic time-bomb poses enormous challenges to society and is expected to strain both the medical care and pension systems.”

Meanwhile, Japanese politics is mired in turmoil. Since Koizumi stepped down, Japan has had three prime ministers in less than three years. Its two largest parties are both woefully unpopular. Last winter, the opposition Democratic Party of Japan (DPJ) — an ideologically diverse mix of conservatives, centrists, and ex-Socialists — seemed a lock to win the next general election, which is due by September. The party already controls the upper house of parliament (as part of a coalition). But then DPJ boss Ichiro Ozawa got embroiled in a fundraising scandal, and on May 11 he resigned. The new DPJ chief, Yukio Hatoyama, 62, is more likable than Ozawa, but he does not appear to be a strong leader. Neither does the current prime minister, Taro Aso, who is 68.

So is Japan set to reprise the 1990s, when it went through seven prime ministers and was paralyzed by economic sclerosis? On the political side, maybe. On the economic side, probably not. In the Nineties, Japan was crippled by a vicious banking crisis that the government failed to remedy. It wasn’t until the Koizumi years (more than a decade after Japan’s real-estate bubble collapsed) that Japanese financial institutions were forced to address their bad loans. Japan’s current woes are largely the result of a steep drop in exports, which remain the principal engine of its economy. Therefore, its recovery is tied to the revival of global, and especially American, demand. Japan’s first-quarter GDP and export numbers were abysmal, but the Nikkei stock average has rallied strongly since March. The country’s most comprehensive economic index rose slightly in April, its first increase in nearly a year.

Signs of economic progress will help the incumbent Liberal Democratic Party (LDP), which has ruled Japan virtually without interruption since the creation of its modern political system in 1955. The LDP may also get a boost from North Korea’s recent nuclear test and missile launches: Voters may worry that the DPJ, which was founded in 1998 and has never held power, is too inexperienced to handle such major national-security challenges.

“The DPJ has no clear foreign-policy vision,” says Michael Green, who served as a senior Asia official at the National Security Council from 2001 to 2005. The party has taken populist stances on U.S. military bases in Japan and vowed to pursue a more independent foreign policy. It is unclear exactly how Hatoyama would govern as prime minister, given that his party includes both a bloc of anti-American leftists and a sizable faction of pro-American conservatives. If he followed through on some of the DPJ’s campaign pledges, it could generate real friction in the U.S.-Japan alliance.

Pyongyang’s latest mischief reaffirmed the importance of that alliance, which the Bush administration did much to strengthen. Since 2001, the U.S. and Japan have upgraded cooperation on a range of security issues, including missile defense and counterproliferation. Widely mocked for its “checkbook diplomacy” during the first Gulf War (to which Tokyo sent money, but not men), the Japanese government dispatched naval ships to aid the U.S.-led coalition in Afghanistan and deployed noncombat ground troops to help rebuild post-Saddam Iraq.

Japan has long been constrained by the straitjacket of its pacifist constitution (written by Americans after World War II). In recent years, it has embraced a more elastic interpretation of that constitution (though it has not formally amended the document) and been a more active participant in global security affairs. “Japan has come a long, long way in a relatively short period of time,” a former Bush-administration official told me in early 2007.

Unfortunately, the U.S.-Japan relationship soured a bit during President Bush’s last years in office, when America changed direction on North Korea. Through Christopher Hill, its envoy to the Six-Party Talks, the Bush administration shifted from a policy of robust sanctions to one of piecemeal concessions in return for dubious North Korean promises. This shift can be traced back to Pyongyang’s first nuclear test, in October 2006. Two years later, just weeks before the 2008 election, the U.S. removed North Korea from the State Department’s list of terror sponsors.

In the short term, says Green, the softening of U.S. policy toward North Korea did “huge” damage to America’s image in Japan. The Japanese “felt betrayed by the Bush administration,” says John Bolton, Bush’s former United Nations ambassador. Indeed, newspapers across the political spectrum in Japan voiced concerns about America’s credibility as an ally. The delisting of North Korea as a patron of terrorism was especially hard for Japan to swallow, since Pyongyang still has not come clean about the Japanese citizens it abducted during the 1970s and 1980s.

After Kim Jong Il’s most recent acts of belligerence, the Obama administration pushed for tough sanctions and enhanced inspections of North Korean cargo, both of which were authorized by the U.N. Security Council. “In some ways,” Green jokes, “we’re all John Bolton now.” But even Bolton disagrees with those — most prominently, columnist Charles Krauthammer — who believe the U.S. should urge Japan to go nuclear in response to Pyongyang’s pugnacity and Beijing’s foot-dragging. A nuclear-armed Japan could spur dangerous proliferation, encouraging the South Koreans and others to acquire their own atomic arsenals. It would almost certainly weaken the U.S.-Japan alliance. For that matter, Japan would seek its own nuclear deterrent only if it had lost faith in the U.S. security umbrella.

Barring such a breakdown in the alliance, Japan will not join the nuclear club anytime soon. Its public has a near-religious devotion to the “Three Non-Nuclear Principles” — Japan will not build nuclear weapons, will not maintain them, and will bar them from its territory — that were adopted by the parliament in 1971. Japan is the only country ever to have been attacked with nukes, and the anti-nuclear taboo remains extremely powerful in Japanese society. Moreover, even conservative officials seem to recognize that an independent nuclear capability would not necessarily advance Japan’s interests.

On the other hand, it is no longer suicidal for a Japanese politician to discuss the nuclear option publicly. In 1999, a right-wing vice defense minister named Shingo Nishimura was forced to resign after saying that Japan might be “better off” if it possessed nuclear weapons. The national mood has grown more hawkish since then. In 2002, Shinzo Abe, then deputy chief cabinet secretary, kept his job after declaring that it would “not necessarily” be unconstitutional for Japan to defend itself with “tactical” nukes.

Tokyo is currently reevaluating its national-defense guidelines. LDP officials have drafted a policy paper recommending that Japan acquire the means to strike missile locations in enemy countries. As Kyodo News reported, Defense Minister Yasukazu Hamada expressed qualms about the idea, and the policy paper itself argues that “preemptive attacks” should be off the table.

Despite the North Korean threat and the rise of China, Japan is still wary of violating its pacifist constitution. Tokyo continues to cap its annual defense spending at 1 percent of GDP, a ceiling that has been in place since the 1970s. And disputes over the legal boundaries of “collective self-defense” continue to impede greater Japanese collaboration with the United States. “Japan never ceases to disappoint,” gripes a veteran Asia hand.

Yet even a nasty recession and a chaotic political scene have not stopped the Japanese from taking incremental steps to bolster their security posture. Earlier this year, Green notes, Japan’s Self-Defense Forces (SDF) conducted the first joint operation of all its branches (air, maritime, and ground), which involved missile defense. Japan is also establishing a joint command in East Africa to manage anti-piracy efforts. Green says that such initiatives reflect a broad political consensus on security issues. “The center of gravity in the Diet [the parliament] hasn’t changed much since Koizumi.” Which means that even if the opposition party takes power, Japan’s foreign policy should stay fairly consistent.

Lee Kuan Yew, the founding father of modern Singapore, famously quipped that allowing the Japanese SDF to venture overseas was like furnishing an ex-alcoholic with liqueur chocolates. A clever line, but hopelessly outdated. Since the early 1990s, Japanese forces have assisted multilateral peacekeeping and security operations across the world: from Cambodia and East Timor to Afghanistan and Iraq. These actions have boosted Japan’s reputation. Getting the Japanese to move farther away from their traditional pacifism won’t be easy. But Kim Jong Il is making it easier.