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Naoto Kan isn’t alone in his “sense of sadness.” He shares it with 126 million Japanese.

Japan’s finance minister is blue over how quickly China is gaining on Asia’s biggest economy. Two years ago, anyone who said China would overtake Japan in 2010 was laughed into submission. Fantasy may soon become reality and the Japanese media can’t churn out enough dire stories about it.

“Generally speaking, it’s a good thing that China and Asia are growing and Japan needs to make efforts to ensure it can benefit from that,” Kan, 63, told reporters in Tokyo last month. “Coming from a generation that experienced high growth, my honest feeling is a sense of sadness.”

Far from being sad, Kan should see this moment for what it really is: one that shakes Japan out of its 20-year slumber.

PricewaterhouseCoopers’s recent prediction that China will overtake the US as the largest economy by 2020 is the talk of Tokyo. It’s shock enough for Japan to fathom playing second fiddle in Asia, never mind China being the globally dominant power 10 years from now. Expect a corresponding surge in sake and whiskey sales around Japan.

Adding insult to injury, the great Toyota is recalling cars in China, and Japan Airlines is bankrupt. Add in deflation and the threat of a Standard & Poor’s downgrade and it’s hard not to conclude 2010 is getting off to a dreadful start for Japan.

The silver lining is the China effect. On the face of it, China’s economy should be larger than Japan’s — its population is almost 11 times bigger. If China’s currency weren’t 40 percent or so undervalued, it would already be No. 2. As many in Japan say, though, size will matter more when China matches Japan’s per-capita income. Japan’s is now 13 times that of China’s.

As the process unfolds, Japan could be well-positioned to benefit. What’s so bad about having a massive economy growing 10 percent in your neighborhood? With the US consumer limping along, Japan needs all the demand for exports it can find.

Policy makers in Tokyo are officially out of reasons to delay the radical change Japan needs. To date, they have had more than their share of warnings: the collapse of the 1980s bubble economy, the “Lost Decade” of the 1990s, the Asian crisis in 1997, the US credit meltdown, you name it.

China is a jolt that Japan can’t manage around. Muddling through isn’t an option when the largest manufacturer and exporter is bearing down on you. Also, China is now the United States’ main creditor, reducing Japan’s leverage in Washington.

If Japan intends to hit the snooze bar and sleep in for a few more years, S&P is standing by to give it a nudge.

S&P last week lowered the outlook on Japan’s AA sovereign credit rating to negative because of diminishing flexibility to cope with the world’s largest public debt. China is making the world quake because of its $2.4 trillion of currency reserves. Japan is spooking the world with its financial frailty.

Stability in China isn’t a given. The immediate risk is overheating. The longer-term problem, the one on which hedge- fund managers are fixated, is that today’s loans may turn sour tomorrow.

Even moderate growth from China may help fill the void left by the highly leveraged US consumer. Japanese Prime Minister Yukio Hatoyama is mending ties with China, whose global influence is increasing as America’s declines. Japan still needs the US for security reasons, yet economic realities are drawing its attention toward Asia.

One example of how China could be the catalyst that has eluded Japan is services. An obsession with manufacturing means Japan neglects its services industry, which is a far bigger part of the economy. China’s threat will focus attention where it needs to be: deregulating services and increasing productivity.

China’s great economic leap forward is in many ways a good- news story for corporate Japan. Officials such as Kan clearly hear the alarm bells and must act accordingly. With China’s arrival, sleeping on the job isn’t an option.

William Pesek is a Bloomberg columnist