Armed with a powerful microscope, Sumio Iijima aims to build a new world. He's a leading researcher in nanotechnology, the burgeoning field of creating new materials and devices by using atoms and molecules as building blocks. Working at NEC Corp.'s (NIPNY ) central research laboratories north of Tokyo, Iijima in 1991 unearthed a new form of carbon, a cigar-shaped molecule called a carbon nanotube. That was six years after Richard E. Smalley's discovery of soccer-ball-like carbon molecules, or buckyballs, for which the Rice University professor won the 1996 Nobel prize in chemistry.

Today, Iijima is manipulating strands of another carbon material that he found in 1998: cone-shaped tubes dubbed nanohorns. Like nanotubes, the tiny horns are up to 100 times stronger than steel. They measure just a few nanometers in diameter, or roughly 1/50,000th the size of a human hair, and tens to hundreds of nanometers long. But nanohorns have a novel feature. They can be hooked together in clusters to form electrodes -- a key component of fuel cells, which generate electricity by chemically combining hydrogen and oxygen. A small one with 10 times the juice of lithium-ion batteries may make its debut late this year for mobile phones and laptop computers. "This could trigger an energy revolution," says Iijima.

The work at NEC has earned international acclaim. But it is noteworthy for more than its scientific merits. Such efforts represent Japan's best hope of building a new engineering and manufacturing infrastructure based on a near-perfect mastery of molecular assembly. Because the underlying science is so complex, Japanese companies hope they can stay ahead of global rivals. "Japan fell behind in info tech and biotech, but this is one field where we're determined to lead," declares Hisanori Shinohara, a Nagoya University nanomaterials expert.

Japanese scientists don't expect a slam dunk. Already, they note, South Korea's Samsung Electronics Co. is building nanotubes into newfangled flat-panel TVs. And major research initiatives are under way in Europe and the U.S. Indeed, around the world, experts are counting on nanotech to transform a host of industries -- computers, drugs, and plastics, to name a few. The Pentagon foresees featherweight bulletproof uniforms made with nanotube fibers. The aeronautics industry envisions supertough coatings for planes.

Yet, proportionate to its population and gross domestic product, Japan is outspending other countries. In 2002, Tokyo budgeted $1 billion for nano R&D, up from $120 million five years earlier. Over the next five years, government funding could jump to $50 billion or more. Analysts estimate that major corporations, including Hitachi, Mitsubishi, and Toray Industries, pumped $1 billion of their own money into nano-related projects last year and will cough up still more this year.

With some wild-eyed forecasts of nanotech's market potential topping $200 billion by 2010, Washington has turned on the faucet, too -- allocating more than $1 billion in R&D funding since 2000. But the two national thrusts are not identical. While the U.S. leads in nanobiology and electronics, Japan excels in complex materials. When it comes to applications, Japan is coming on "very strong and driving more products to market faster," says F. Mark Modzelewski, executive director of trade group NanoBusiness Alliance in New York.

For example, Nissan Motor Co.'s (NSANY ) X-Trail sport-utility vehicle has front fenders made of a lightweight composite reinforced with nanotubes. Sony Corp. (SNE ), a leading supplier of lithium-ion batteries for portable gizmos, is making a version that replaces some normal graphite electrodes with the same tubular molecules to prolong the battery's life. And scientists at Inri Inc., a venture founded last

Nanotechnologists are working with many materials other than carbon nanotubes, but Iijima's offspring are probably the favorite building blocks for most applications now on drawing boards. Originally, nanotubes were Russian doll-like structures -- a tube within a tube inside another tube. Researchers have since learned how to produce single- and double-wall nanotubes as well. And Iijima showed how the properties of each tube can be controlled -- to function as a conductor of heat and electricity, a semiconductor, or an insulator -- depending on the orientation of its carbon atoms. As researchers develop better methods for tailoring the wide range of nanotube combinations, the already expansive product list can only grow. Among the items due to hit markets soon are new flat-panel displays. Several Japanese companies, including Mitsubishi Electric Corp., are working on energy-saving flat panels, using double-wall nanotubes, for computer displays and TVs.

Iijima's research on fuel cells for phones and laptops is now being applied to a bigger challenge: a low-cost fuel cell for cars. The fuel cells in today's prototype cars typically use an expensive platinum catalyst -- one reason that the fuel cell accounts for about half of the car's total cost. "If we can develop a nanohorn version, this could be a very big market," says Iijima. Toyota Motor Corp. (TM ), meanwhile, has another idea up its sleeve. In collaboration with Nagoya's Shinohara, it is braiding nanotubes into ropes for storing hydrogen in fuel-cell cars.

Japanese chip and optical communication companies are also betting big on nano-technology. To NEC and Hitachi (HIT ), nanotube transistors seem just the ticket for superchips that won't overheat. At Fujitsu Ltd. (FJTSY ) and Nippon Telegraph & Telephone Corp. (NTT ), scientists hope to build circuits by laying nanotubes on silicon. First, though, they must figure out how to control more precisely the density and size of nanotubes. "Once we've mastered that, their performance will be spectacular," asserts Junichi Sone, head of NEC's R&D.

Exotic applications aside, Japan aims to be a top supplier of nanotubes themselves. Two years ago, total world output of nanotubes was only around a ton a year. Late last year, Mitsui began ramping up production of multiwall nanotubes and next year may churn out 10 tons a month. And Toray Industries Inc., Japan's largest textile manufacturer, is building a plant to make double-wall nanotubes for flat-panel displays.

Now come the nano startups. Shunichi Osawa, a Daiwa Research Institute analyst, estimates that Japan already has about 100 nanotech ventures. That pales in comparison to the U.S., which launched 1,000 nano-related startups last year alone. To compensate for the lack of a venture-capital culture at home, Japanese companies are also investing in promising U.S. and European ventures, funding research at overseas universities, and even forging links with Asian companies that could turn into future rivals. "Japanese companies need all kinds of collaboration if they hope to survive," explains Naoki Yokoyama, head of Fujitsu Ltd.'s Nanotechnology Research Center.

On the home front, nanotech venture capitalists have raised $250 million in the past two years from such backers as Hitachi, Mitsubishi, and Marubeni Corp. Next, the VCs hope to enlarge their pool of funds substantially, then nourish a vibrant entrepreneurial climate in nanotech. Japan's drive to become a nano powerhouse could be just the start of a cultural transformation as well.