Nick Conklin (Michael Douglas) is a skilled motorcyclist and a tough veteran New York City police officer facing possible criminal charges; Internal Affairs believes Nick was involved with his partner who was caught taking criminal money in a corruption scandal. Nick is divorced from his wife, who has custody of their two children. Nick also has financial difficulties due to alimony and child support as well as other concerns.
Nick reports to a criminal investigation hearing being run by two officers from Internal Affairs, a conference that doesn't go well for him. They ask Nick about his involvement with several officers under investigation. When Nick refuses to squeal on his comrades, Internal Affairs threatens him, suggesting he's as corrupt as the others in the department.
While having a drink at a local Italian restaurant/bar, Nick and his partner Charlie Vincent (Andy Garcia) observe two Japanese men having what appears to be a friendly lunch with some Italian gangsters. Nick is increasingly suspicious of the group until another Japanese man enters the restaurant with several armed henchmen and seizes a small package at gunpoint from the leader of the Japanese. As the man turns to leave, one of the Japanese men at the table says, in Japanese, "The Oyabun [Godfather] will not stand for this." The leader of the Japanese group chimes in, "As always, such a troublesome child." The Japanese man finds these remarks insulting and he slashes the man's throat, stabs another in the chest, and then walks out. Nick and Charlie follow immediately and, after a short chase, arrest the suspect after he nearly kills Nick in a nearby slaughterhouse.
The suspect turns out to be a Yakuza gangster by the name of Sato (Yusaku Matsuda). The situation is further complicated when Nick's superior officer, Captain Oliver (John Spencer), tells him that Sato is to be extradited to Osaka and given to the police there. Nick is angry that Sato will not be tried for murder in the United States, but agrees to escort him to Japan. Nicks captain also has an ulterior motive for sending Nick overseas; he believes the excursion will keep Nick from causing more trouble and exacerbating the already biased Internal Affairs investigation of him.
On the plane, Nick and Charlie talk about Nick's situation and how Nick's own expenses are beyond his means to pay them. At one point, while Charlie is out of his seat, Sato notices Nick cheating at solitaire and contemptibly chuckles to himself. Nick cruelly hits his prisoner in the mouth and lies about it when Charlie returns and asks what happened.
When they arrive in Osaka, men identifying themselves as Japanese police immediately meet them on the plane, display a "transfer document" printed in Japanese and take Sato into their custody, leaving the plane by the rear exit. As Nick and Charlie are about to get off the plane themselves, another group of police enter from the front and identify themselves in English, indicating that the first "cops" were impostors.
Nick and Charlie are taken to the headquarters of the Osaka Prefecture of Police and questioned. They are also blamed for Sato's escape. After much haranguing by Nick (who shows xenophobia) towards the Japanese, who rarely acknowledge that they can speak English, he and Charlie are allowed to observe the hunt for Sato. However, the senior police officer emphasizes that they have no authority in Japan and it is illegal for them to carry their guns, which are confiscated. They are assigned to Masahiro Matsumoto (Takakura), a mild-mannered and experienced officer, who will be their guide.
Throughout the investigation Nick behaves rudely, offending Matsumoto, while Charlie tries to be more polite. Taken to a murder scene at a local nightclub, Nick recognizes the murder victim as one of the men at the airport who took Sato into custody. While the dead man is examined by forensics experts, one of them removes a $100 bill from his mouth.
Nick makes contact with an American blond nightclub hostess, Joyce (Kate Capshaw), who explains that the Japanese public, including the giggling hostesses in the club, all believe that Nick and Charlie are not to be taken seriously because they allowed Sato to easily escape from custody, and represent American inefficiency and stupidity. Through Joyce, Nick discovers that Sato is fighting a gang war with a notorious crime boss, Sugai (Tomisaburo Wakayama). Sato used to be a lieutenant for Sugai and now wants his own territory to rule. Sato had traveled to New York to disrupt a meeting with American Italian gangsters about a scheme being set up by Sugai involving the package Sato had taken in the restaurant.
Having joining a police raid of a gang hideout without permission, Nick takes some $100 bills from a table, which he later shows are forgeries by burning one. The next day Matsumoto explains they have dishonoured themselves, him and the police force by this theft, which has been reported back to America; Nick just claims he ought not to have "snitched" to his superiors, and demonstrates the forgery in Matsumoto's superior's office. He suggests that the package stolen by Sato was either more samples of the forged bills or plates to make more.
Late one night, after spending a few hours in a nightclub with Matsumoto, Nick and Charlie walk back to their hotel slightly drunk and unescorted, despite previous warnings about their safety from Matsumoto. They are harassed by a young punk on a motorcycle, and it seems to be a joke until the motorcyclist steals Charlies raincoat and lures Charlie into an underground parking garage. Nick follows, shouting for Charlie to come back, but is separated from his partner by a security gate. The unarmed Nick then watches in horror as Sato and several of his bszoku gang members briefly torture Charlie using swords and knives, before Sato beheads him. Distraught, Nick is comforted by Joyce at her apartment. Matsumoto arrives with Charlie's belongings, including his NYPD badge, which Nick gives to Matsumoto, and Charlie's service pistol, which Nick keeps for himself.
Matsumoto and Nick trail one of Sato's operatives, a well-dressed young woman; overnight the policemen discuss their different cultures, and Nick admits to Matsumoto that he had taken some money in New York, where he says there is no "black-and-white" procedure, only "gray" areas. Matsumoto disagrees, saying "theft is theft" and that Nick's illegal action disgraces all police, including Matsumoto and Charlie. Nick realizes Matsumoto is right and humbly accepts Matsumoto's advice. In the morning the woman retrieves from a bank strongbox a sample counterfeit note (printed only on one side) which she passes to one of Sato's gang on the street. Nick and Matsumoto tail the man to a steel foundry where they find Sato meeting with Sugai, and discover that the package that Sato had stolen in New York contains one of the printing plates for the American $100 bill. Nick intervenes when Sato leaves the meeting and a gunfight ensues. Sato escapes again when Nick is arrested by the swarming police for using a gun in public, and told he will be sent back to New York in disgrace.
Nick boards the plane for New York but is able to sneak off to pursue Sato on his own. He finds that Matsumoto has been suspended and demoted by his police force, a deep humiliation. Joyce helps him meet Sugai, who explains that making counterfeit U.S. currency is his revenge for the pollution, the "black rain", that he witnessed after the bombing of Hiroshima and the loss of dignity he and his family faced in the aftermath of World War II. Nick suggests a deal where Sugai can use Nick as an insignificant American to retrieve the stolen plate from Sato, leaving Sugai's reputation and hands clean.
Sugai drops Nick at the outskirts of a remote farm where a meeting of the oyabun, the other crime bosses of the region, is to take place. Nick is supplied with a shotgun. Sato arrives a short time later, as does Matsumoto. Matsumoto and Nick discover that Sato's men are planning a massacre. At the meeting table, Sato surrenders his single plate and requests recognition and his own territory. However, Sugai demands that Sato first atone for his offenses against the Yakuza code in the traditional way: he is ordered to cut off one of his fingers (yubitsume), which he duly does. As he takes his position next to Sugai, he stabs the elder gangster in the hand and escapes with both the plates, prompting a gunfight between Sugai's and Sato's men. Sato escapes the fight on a dirt bike with Nick close behind. Nick is able to spill Sato off his bike and the two fight briefly, until Nick gains the advantage. The scene ends with Nick having to decide whether or not to kill Sato for Charlie and for all the humiliation he has suffered.
The film ends with Matsumoto and Nick walking a handcuffed Sato into police HQ to the amazement of everyone and later receiving commendations, which Nick graciously accepts. At the airport, Nick thanks Matsumoto for his assistance and his friendship, and gives him a gift box containing a dress shirt. Underneath the shirt, Matsumoto finds the two counterfeit printing plates.