To this gaijin, Japan looks prosperous, clean, highly functioning. At Takashi-maya, the high-end department store atop the central train station in Nagoya, shoppers line up in orderly queues before the 10 a.m. opening. But Japan seems to be in the midst of an existential crisis—in the first quarter it shrank at an abysmal 15.2 percent annual rate. In 10 days traveling through the country, I couldn't find anyone who thought the ma-laise would end soon.

Japan's rise literally from rubble into an industrial powerhouse is one of the greatest economic stories of the 20th century. But a slow response to the bursting real-estate and stock bubbles of the 1980s consigned the country to a decade of economic slumber from which it has yet to fully awake. The first great wave of globalization was kind to Japan. But the second wave, dominated by China, which is set to surpass Japan this year as the world's second-largest economy, poses a serious challenge. The unemployment rate has spiked to an unthinkable 5.2 percent, and Japan seems to have reconciled itself to decline. Twenty years after the publication of The Japan That Can Say No, a manifesto of self-assertion co-written by Sony chairman Akio Morita, we seem to have The Japan That Can Grow Slow. And part of it is because Japan, like the baby boomers in America, is mellowing as it gets older.

Japan still retains its lead in engineering. A showroom at Panasonic's headquarters displayed a heated, multifunction toilet seat that conserves energy. (Wouldn't leaving the seat cold conserve even more?) The sleek Shinkansen bullet trains roll up to their appointed spots on time. TKX, an 87-year-old Osaka-based company that makes abrasives, has adapted its expertise to cutting silicon ingots into wafers for solar panels.

But social engineering is proving more challenging. Japan's population peaked in 2004 at about 127.8 million and is projected to fall to 89.9 million by 2055. The ratio of working-age to elderly Japanese fell from 8 to 1 in 1975 to 3.3 to 1 in 2005 and may shrivel to 1.3 to 1 in 2055. "In 2055, people will come to work when they have time off from long-term care," said Kiyoaki Fujiwara, director of economic policy at the Japan Business Federation.

Such a decline is cataclysmic for an indebted country that values infrastructure and personal service. (Who is going to maintain the trains, pay for social benefits, slice sushi at the Tsukiji fish market?) The obvious answers—encourage immigration and a higher birthrate—have proved difficult, even impossible, for this conservative society. In the U.S., foreign-born workers make up 15 percent of the workforce; in Japan, it's 1 percent. And, official protestations to the contrary, they're not particularly welcome. One columnist I met compared the standard Japanese attitude toward immigrants to that of the French right-winger Jean--Marie Le Pen. In the 1990s, descend-ants of Japanese who had emigrated to South America early in the 20th century returned to replace retiring factory workers. Now that unemployment is on the rise, Japan is offering to pay the airfare for those who wish to return home.

Japan doesn't particularly want to import new citizens, but it doesn't seem to want to manufacture them, either. It's become harder to support a family on a single income, and young people are living at home for longer. And Japan isn't particularly friendly to working mothers—pre-K day care is not widely available, and the phrase "work-family balance" doesn't seem to have a Japanese translation. (The directory of the Japanese Business Federation, a showcase of old guys in suits, makes the Republican Senate caucus look like a Benetton ad.) The upshot: a chronically low birthrate. Too often, demographic change was described to me as a zero-sum game—rather than being seen as potential job creators, women and immigrants are often seen as taking jobs from men.

Chalk it up to age, or to culture, but Japan strikes me as strangely passive about the huge changes it is facing. I heard plenty of bromides about the need for new policies toward both immigration and work-family issues, but no real policies. "The ongoing issues of the lower birthrate and the aging society have been going with such speed that the national design of how to respond to that has not caught up yet," said Yuriko Koike, a television reporter turned politician (Japan's first female defense minister) and one of the most prominent women in public life.

As befits a nation riven by geological faults, the focus seems to be on planning to use technology to manage the impact of unstoppable events rather than averting them. In Toyota City, where robots do 90 percent of the welding work on Priuses at the Tsutsumi plant, I asked a city official how demographic changes would affect the delivery of health care. He responded, only partially in jest: "Maybe the robots will take care of us."

Gross is NEWSWEEK’s economics editor.

© 2009