The outcry in Japan against Nagai’s killing has been intense. Kei Nemoto, a professor at Tokyo’s Sophia University and Japan’s leading Burma expert, has called on the government to impose sanctions and withdraw its ambassador. Members of Japan’s Parliament have condemned the shooting, and Foreign Minister Komura upbraided his Burmese counterpart in a chilly meeting in New York while attending the U.N. session there. The Asahi newspaper has run editorials voicing the collective anger of Japan about the brutality of the regime. Various Burmese dissident groups in Japan have also called on the government to impose sanctions, refugees are staging a hunger strike, and there are large and noisy demonstrations every day in front of the Burmese Embassy in Tokyo.

How long can the junta rule hold onto power if its remaining allies, including Japan, China and ASEAN (the 10-member association of Southeast Asian nations that includes Burma), turn against it? No one knows what Burma’s paranoid leaders are thinking. But the generals should have little doubt about what’s going through the minds of foreign leaders. Even Burma’s erstwhile friends are angry at it. The violence has turned the pariah state into a huge political liability for China, the regime’s most sympathetic and influential backer. With the 2008 Olympics fast approaching, China is under intense pressure to abandon its longstanding policy of nonintervention. This often-invoked mantra is undermining China’s global stature and increasingly looks like an evasion of its growing responsibilities. China has already reversed course on Sudan, which it recently pressured to allow a U.N. peacekeeping force. Burma may be next.

Tokyo is also confronting growing pressure to abandon its policy of “constructive engagement” with Burma and to slap on sanctions instead. Burmese exiles favor this approach, citing Aung San Suu Kyi’s longstanding support for economic isolation of the junta; Tin Win Akbar, a member of the democratic opposition living in Japan, recently told reporters that without sanctions there could be no political change. He’s right: constructive engagement, defined as maintaining ties in order to influence the regime’s behavior, has produced no improvement in Burma over the past 20 years; continuing it now will only mean abandoning the Burmese to their gulag. Hla Aye Maung and Sai Tun Kyar, activist refugees in Tokyo representing the Arakanese and Shan people of Burma, argue that Burmese people favor sanctions because they have nothing left to lose except their oppressors.

So far, Japan’s new prime minister, Yasuo Fukuda, has hesitated to take any decisive steps pending a Burmese government investigation of Nagai’s death and the U.N. report of special envoy Ibrahim Gambari’s recent visit. But it’s telling that Fukuda hasn’t ruled out the possibility of imposing sanctions in the future. Indeed, his reticence on this point suggests that the crisis may lead to a major shift in government policy. Japan is Burma’s leading provider of official development assistance, having forked over 3 billion yen ($25 million) in 2006. Bilateral trade, meanwhile, amounts to nearly 50 billion yen ($400 million) in 2006. Cutting off these funds would not bring the junta to its knees. But it would certainly increase pressure on Burma’s other Asian backers to follow suit.

China, Japan and ASEAN (which includes Burma) should work together to structure penalties and incentives that will convince the junta that it is running out of time, that the world is running out of patience, that Than Shwe is yesterday’s man and that the military must return to the barracks and accept a civilian democracy. Japan, working with China and Thailand should exploit divisions within Burma’s leadership to nudge moderates to help arrange a soft landing for the country. Freezing bank accounts, banning investments and imposing an embargo on arms sales and energy exports could convince rational thinkers in the junta to embark on a transition process that aims to give Aung San Suu Kyi the opportunity she won in the last elections–17 years ago. Any deal may require power sharing and amnesties for some of Burma’s rulers. But compromise is preferable to the status quo if it leads to a deal.