This paper identifies potential implications of knowledge cluster formation for the advancement of the knowledge based economy in Japan. Theoretical background of the knowledge-based economy and knowledge cluster have been used to evaluate and confront Japan’s knowledge economy indicators for 20 years with global frontiers and catching-up countries – indicatory analyses have confirmed a narrowing gap of emerging markets with special regard to Singapore and China. Furthermore, major impediments and challenges at both the macro and micro level have been listed to indicate, among others, policy challenges related to the education system, and the institutional and regulatory framework of business and research institutions. Consequently, based on empirical data collected by authors in Tokyo and Nagoya, Japan, a case study of Tokai Region Nanotechnology Manufacturing Cluster has been presented to investigate results of the last ten years of MEXT’s Knowledge Cluster Initiative and to draw conclusions. So far, output within such aspects as patents, scientific articles, high-tech sales or commercialisation appear relatively modest when confronted with macro indicators. However, authors associate this situation with the specificity of a knowledge cluster – long-term research projects are expected to provide new ideas and technological solutions in the form of materials, devices, processes to be further developed, applied and commercialised. Therefore, it is the matter of time, possibly decades.