By now, you are no doubt familiar with the prosecution's case: Japan is in the midst of a long, slow slide into irrelevance. Those aiming to prove that thesis have held the floor for years. Their evidence is compelling. Despite a recent rally, Japan's stock market remains 75% off its 1989 all-time high. Zombie companies swamp the banks with bad debts, yet the banks refuse to cut off those deadbeat borrowers—which perpetuates the vicious cycle and ties up capital that should be put to better uses. Japan's economic growth, once the envy of the world, has stalled (perhaps permanently) as rival China continues to boom. And institutionalized political gridlock ensures that structural reforms so badly needed to kick start the whole system are always just over the horizon.

But what if there were another side to the story? What if the beginnings of a brighter destiny (and perhaps economic revival) are already stirring? According to an increasing number of believers, Japan's days as an industrial powerhouse may well be on the wane, but its role as a global trendsetter—in cutting-edge music, art, fashion, design and other pop-culture categories of every stripe—is only now just getting started. In Japan, they say, the future is cool.

Until recently, Japan's cool quotient was secondary to its industrial output. For nearly 50 years, Japan's economic fortunes—and its identity—have been intimately tied to its dominance as a producer of high-quality, high-tech exports. Thanks to the Japanese government's policies protecting targeted industries in the aftermath of World War II, the country became, in just two generations, the undisputed metal shop and electronics lab to the world. Denied an army, Japan instead transformed itself into an economic superpower, quickly building the second largest gross domestic product on the planet.

But a disastrous thing happened on the way to the 21st century. Starting in the 1990s, Japan discovered that its competitive advantage in its key export-manufacturing industries was not sustainable. Once the producer of 59% of the world's computer chips, Japan currently makes only 24%, according to research firm Gartner Dataquest. Just about any country, it turns out, can make a great stereo if it sets its mind to it, and even Japan's blue-chip manufacturers are now under unprecedented pressure. Today, Samsung television sets from South Korea are every bit as good as Sony's; Haier refrigerators from China match up well with Toshiba's; and even America's GM and Ford have proved that they can, when pushed, produce cars that meet Toyota's and Honda's in quality, price, gas mileage and durability.

In the wreckage of Japan's increasing inability to compete against the lower labor costs and rekindled ambitions of its rivals, however, a number of observers both inside the country and out are turning to the nation's creative and cultural enterprises as a source of potential salvation. For this has been one of the greatest Japanese ironies: even as Japan's economic leadership has been slipping for more than a decade, its cultural hegemony has only swelled. "Japan has changed from being a corporate manufacturing and industrial society to a pop-culture society," says Ichiya Nakamura, a visiting scholar at Stanford Japan Center and M.I.T. Media Lab. Pokémon has supplanted Astroboy in the hearts of schoolkids in more than 65 countries, and 60% of the world's animated-cartoon series are made in Japan. Games running on PlayStation 2 and (to a lesser degree) Nintendo's Game Cube rule the video-game universe just as tightly as before, despite a frontal attack from none other than Microsoft and its sinister-looking black Xbox. And high-end Japanese fashion designers such as Hanae Mori, Yohji Yamamoto and Issey Miyake are not only as vital as they once were; they have also been joined by a generation of young turks such as A Bathing Ape, Jun Takahashi and Naoki Takizawa who set the style for hipsters from Berlin to Bangkok and beyond. Japanese films, TV series, music acts and lifestyle magazines, meanwhile, routinely spark fads all over Asia. (Turn on MTV in Singapore or Hong Kong and you are just as likely to see Ayumi Hamasaki as J. Lo.) According to Tsutomu Sugiura, director of the Marubeni Research Institute, an economic think tank, Japanese cultural exports—such as from the media, licensing, entertainment and other related industries—have tripled over the past 10 years to $12.5 billion, while manufacturing exports have increased by only 20%. Granted, $12.5 billion seems like a rounding error in Japan's $4 trillion economy (Toyota alone hauls in nearly $11 billion in sales every month), but it's still the result of a growth rate almost unheard of anywhere else.