The Japanese nation belives that without plentiful stocks of fundamental basic research activities, research and development and promoting creativity in science and technology, they will have no way to ensure the development of the nation. Thus, the Japanese higher educations challenge is to identify the structural reform required to reverse the traditional focus of the educational sector. The current concern to expand graduate education, changes the chair system, expands university -industry collaboration, and increases the number of foreign researchers in Japanese laboratories. These are all part of the thrust for a new and more stimulating higher educational process. But even bolder reforms are required if Japan hopes to move the educational sector to a new knowledge creation paradigm. This paper tries to clarify how the Japanese Government, University and Industry support each other to promote the basic research and development, together with the challenge of this century. This paper also reviews the current wave reform that seeks to restore the higher educations position as the central creator of knowledege From this study, it can be seen that Japans universities have been effective in knowledege seeking but poor in knowledge creation, and hence that Japan has been devising alternate institutions to meet these needs. Thus, a major concern in the present reform effort is to bring greater flexibil1ty and instability to a system that is premised on limited choice and stability.