Former Prime Minister Abe Shinzo and other Japanese politicians are fond of appealing to the Meiji Restoration when calling for reform. After 2007, however, it seems Japan is not in the midst of restoration but rather at the nadir of another bakumatsu — the term used to describe the breakdown of the Tokugawa shogunate in the 1850s and 1860s.

In 2008, Japan will continue to grope for a new system to replace the postwar system of corporate allegiance and lifetime employment that failed in the early 1990s. What's clear is that Japan needs a new set of institutions for the age of globalization, institutions that acknowledge the role played by international openness in wealth creation.

To begin moving in this direction, Prime Minister Fukuda Yasuo will have to tackle three significant policy challenges, all while outmaneuvering conservative ideologues within his ruling Liberal Democratic Party (LDP) and outfoxing the opposition Democratic Party of Japan (DPJ).

First, he will have to make progress on restoring macroeconomic stability, shrinking Japan's colossal debt and finding a way back to monetary normalcy. The uncertain global economic outlook may be a more formidable obstacle on this front than any domestic obstacle.

Second, he will have to restart structural reform, which was effectively put on hold under Mr. Abe. The challenge is that the government will have to push for reform—especially in the labor market—at the same time that it builds a new welfare system to fill the role that companies once played in providing social security for the Japanese people. Structural reform will also entail addressing the problems of Japan's stagnant regions and broken education system.

Third, he has to fix Japan's broken institutions. In 2007, both the Diet and government ministries were rattled by corruption and malfeasance, with the most significant example being the pensions scandal that contributed to Mr. Abe's downfall. Japanese institutions need to become leaner, more transparent, and more accountable. Government ministries need inspectors general and auditors; whistleblowers must be encouraged and protected.

The domestic and international obstacles facing Mr. Fukuda are such that the most he may be able to do is focus the attention of the government and the people on a vision for the new Japan that heeds the concerns of the Japanese people. If he does this he will have accomplished more than his predecessor, Mr. Abe, and will at least laid the groundwork for the difficult task of building a new order.

Mr. Harris is a former aide to a DPJ member of the House of Councillors. He is now a freelance writer and author of Observing Japan (www.observingjapan.com), a blog on Japanese politics.