(FORTUNE Magazine) – SPECIAL REPORT/COVER STORY 38 THE BIG SPLIT The economic and geopolitical ties between the world's two wealthiest nations can no longer be taken for granted. The Japanese are bristling with a self- confidence bordering on arrogance. That new mood, added to a souring American attitude toward Japan, has produced the deepest split between the two countries since World War II. Look for increasingly tough trade fights, strains in the American-Japanese security alliance, and further Japanese penetration of markets abroad. by Carla Rapoport

COMPETITION 50 IS WAL-MART UNSTOPPABLE? The new No. 1 retailer is headed toward decisive battles with its archrival -- a smarter, updated Kmart. But keep your eye on a third combatant: fast- moving Target. by Bill Saporito

MONEY & MARKETS 60 WHAT FRED CARR'S FALL MEANS TO YOU The biggest insurance failure ever, Executive Life could cost the industry and policyholders billions. It is undermining the idea that this business's products are safe. by Carol J. Loomis

62 WORRIED ABOUT YOUR INSURANCE?

MANAGING 64 SECRETS OF GREAT SECOND BANANAS Rather than be CEO someplace else, three tough executives each chose to operate as No. 2 at winning corporations. The masters of hands-on tell why -- and how -- they do it. by John Huey

72 MORE SECOND BANANAS & ONE BAD APPLE

78 DO DIRECTORS EARN THEIR KEEP? With the pay steadily rising, people who serve on more than one board can take home a tidy sum. The challenge is keeping them focused on shareholder interests. by Graef S. Crystal

INNOVATION 81 PRODUCTS TO WATCH NEC's brainy PC-VCR, Papa Dash Lite Salt (with no bitter aftertaste), and more. by Stephanie Losee

AUTOS 83 HOW BUICK IS BOUNCING BACK Long in the dumps, Buick demonstrates that paying attention to what traditional customers want can pay off big. Maybe General Motors can learn some lessons. by Alex Taylor III

TECHNOLOGY 90 CHIPPER DAYS FOR U.S. CHIPMAKERS Once largely given up for dead, they are now capitalizing on their superior skills at innovative design. Their semiconductors are selling fast -- and are nicely profitable. by Brenton R. Schlender

94 OF DRAMs AND MEGABITS: WHAT CHIPS DO AND HOW THEY DO IT

CORPORATE PERFORMANCE 98 TURNING WATER INTO GOLD Here's how Nalco, an unsung Illinois chemicals maker, is extracting profits by riding the wave of environmentalism. by Ronald Henkoff

100 COMPANIES TO WATCH Keystone International produces valves for use in fields as widespread as oil and breweries, and for markets from Houston to China. by Ret Autry

Also: American Power Conversion, Acuson, and Handex Environmental Recovery.

POLITICS & POLICY 103 GETTING JUNKIES TO CLEAN UP And inducing teenage mothers, high school dropouts, and drunken drivers to change their behavior. It isn't easy, but some new approaches are beginning to make progress. by Lee Smith

DEPARTMENTS 4 EDITOR'S DESK 6 INDEX 8 NEWS/TRENDS | Which CEOs are cutting back, the clean car 500, fashion designers snip prices, Japan exports tearoom kits, drawing a bead on martial shoppers, S&L summer auctions, and more.

19 FORTUNE FORECAST The Fed will get stingier, predict Fortune's economists, as it moves from trying to soften the recession to holding down inflation. by Todd May Jr.

23 PERSONAL INVESTING FORTUNE's quarterly investment guide: Look to small-company stocks and get ready for cyclicals. In bonds, stick with intermediate Treasuries and insured munis until inflation signals are clear. As for commodities, you can find good values among mining stocks.

A new table ranks the best stock mutual funds in six categories, from aggressive growth to international funds.

Also: Portfolio Talk with Hakan Castegren of Boston Overseas Investors.

111 FORTUNE PEOPLE A little rain falls on Steve Jobs, muscular morality at Harvard, Ann Knight switches gears at Paine Webber, and more. by Alan Deutschman

112 ON THE RISE

113 LETTERS TO FORTUNE

115 KEEPING UP by Daniel Seligman

ABOVE: Graphic designers at ICS in Tokyo turn to Apple computers to produce their firm's specialty -- annual reports. Photograph by Takeshi Yuzawa.

COVER: Illustration by Robert Crawford.