By BRAD GLOSSERMAN From today’s Wall Street Journal Asia.

If demography is destiny, Japan is in trouble. The country is the “grayest” in the world, and its population is shrinking. These two developments will sap Japan’s economic vitality. But little attention has been paid to how this changing demographic profile could affect regional security and U.S. strategic interests in Asia. Because the alliance with Japan is the cornerstone of the United States’ engagement with Asia, American policy makers need to begin developing a strategy that prepares the alliance for this impending shift.

To understand the urgency of the situation, consider that 21.5% of Japan’s population is age 65 or more — a share that will expand to 39% by 2050. And while Japanese now enjoy a life expectancy of 81.25 years, the population is shrinking as fewer children are born. Today, there are 127 million Japanese, but that number is expected to drop by around 30% by 2055, when the population will reach 89 million. The main culprit is a plummeting fertility rate.

The economic implications of this demographic transition are well known. As the number of working-age citizens shrinks, economic growth will slow, tax revenues will fall and government budgets will be squeezed. The cost of doing business will rise and investment capital will seek more dynamic markets. Japan will continue to be rich, but the country will be living off its wealth, not creating it. According to an estimate by McKinsey Global Institute, household wealth will enter an absolute decline over the next two decades, and by 2024 it will have returned to 1997 levels.

The strategic implications of this shift are equally important. Japan’s demographic transition will act as a guillotine, cutting off the country’s policy options. Most simply, budget priorities will shift. Health care, currently underfunded, will become a considerable drain on the government purse. Defense spending — always a tough sell in Japan — will feel a tighter pinch. Recruitment for the Self Defense Forces, already difficult, will get harder. The reluctance of some Japanese to see their country assume a higher security role will be intensified as the population gets older and more risk averse. Japan will be reluctant to send its most precious asset — its youth — into combat.

Other forces will reinforce Japan’s increasingly inward-orientation. Foreign aid and investment have laid the foundation for Japanese engagement with Asia (and the world). But as the domestic economy dwindles, official development assistance and the investment capital that lubricated foreign relations will shrink. This will diminish Japan’s status in the region as other countries replace Japanese funds.

All won’t be negative: The demographic transition will make it difficult, if not impossible, for other regional powers to demonize Japan as in the past. The bogeyman of remilitarization could be laid to rest for good. This will help eliminate one of the most important obstacles to regional cooperation and provide a real impetus for Asian solutions to Asian problems.

However, Japan’s evolution also creates challenges for its neighbors. Will China treat its former rival with dignity and respect, forging a genuinely cooperative relationship? Or will Beijing muscle Tokyo aside and assume the leading role in Asia? A solid Tokyo-Beijing axis could provide the cornerstone of genuine Asian integration, just as the Paris-Bonn link drove Europe’s community-building process.

Seoul will also be at a crossroads. It could give vent to its long-suppressed anger over Japanese colonization of the Korean Peninsula and its junior status in the region. Or the South Korean government could reach out to a country with similar interests, values and concerns to forge a forward-looking partnership of like-minded nations.

No relationship will be more affected by the demographic change that that of the U.S. and Japan. The new Japanese mindset poses a direct challenge to the evolution of the U.S.-Japan security alliance over the last decade. This period has been characterized by pressure from Washington for Tokyo to “put boots on the ground” in trouble spots like Iraq and Afghanistan. Yet paradoxically, at the very same time Japan will be fending off U.S. requests to do more militarily, Tokyo is likely to try to move even closer to the U.S. in response to its straitened economic circumstances and a fear that it is being eclipsed by a dynamic, rising China.

The U.S. needs to be prepared for these contradictory impulses and adjust how it engages Japan accordingly. First, it must abandon the quid pro quo mindset that often characterizes alliance discussions. Japan will have considerably less to contribute to the alliance, but that should not mean the alliance is less important. Discussion should focus on how Japanese contributions serve larger public and regional interests. Japan must do its part and come up with creative ways to share burdens and responsibilities.

Second, the U.S. should shift the alliance’s center of gravity away from military issues. Japanese engagement in this area will become more problematic. If Washington pushes Tokyo harder to make military contributions, it risks politicizing the alliance and undermining its support in Japan.

Third, the U.S. should create and strengthen regional institutions. Regional security mechanisms can pick up the slack as the U.S.-Japan alliance evolves. Other economic and political organizations can minimize tensions in the region. This process should begin soon, while Japan has more influence to maximize its leverage during the creation process. Washington and Tokyo should stop seeing their bilateral alliance and multilateral institutions as zero-sum alternatives. The U.S. should not see this process as a threat to its interests; instead, it should trust Tokyo to see that its interests are respected in these discussions. That would constitute a new form of burden sharing.

Finally, the U.S. has to get its own economic house in order. Washington has relied on Japanese savings — along with those of China and other Asian nations — to finance its profligacy. As Japan ages, it will no longer have those funds to lend to the U.S. This is a potentially wrenching adjustment for America — one that might produce some premature aging of its own.

Mr. Glosserman is executive director of Pacific Forum CSIS, a Honolulu-based think tank. This article is drawn from his recent study, co-authored by Tomoko Tsunoda, “The Guillotine: Japan’s Demographic Transformation and Its Security Implications.”