In 1876, former U.S. Army Captain Nathan Algren, a skilled soldier who has become a bitter alcoholic traumatized by the atrocities he committed and witnessed during the American Indian Wars, is approached by his former commanding officer Colonel Bagley. Bagley asks him to train the newly created Imperial Japanese Army for a Japanese businessman, Omura, who intends to use the army to suppress a samurai-headed rebellion against Japan's new emperor. Despite his hatred of Bagley, the impoverished Algren takes the job for the money. He is accompanied to Japan by his old friend, Sergeant Zebulon Gant. Upon arriving, Algren meets Simon Graham, a British translator knowledgeable about the samurai.
Algren learns that the imperial soldiers are simply conscripted peasants with shoddy training and little discipline. While training them to shoot, Algren is informed that the samurai are attacking one of Omura's railroads; Omura sends the army there, despite Algren's protests that they are not ready. The battle is a disaster, as the undisciplined conscripts are routed, and Gant is killed. Algren fights to the last before he is surrounded; expecting to die, he is taken prisoner when samurai leader Katsumoto decides to spare him; General Hasegawa, a former samurai serving in the Imperial Army, commits seppuku rather than be taken prisoner. Algren is taken to Katsumoto's village and, at Katsumoto's request, is taken in by Taka, Katsumoto's sister and the widow of a samurai killed by Algren. While he is poorly treated at first, he eventually gains the samurai's respect and grows close to Katsumoto. With the help of Taka, Algren overcomes his alcoholism and guilt, learns the Japanese language and culture, and is trained in the art of kenjutsu. He develops sympathy for the samurai, who are upset that the pace of modern technology has eroded the traditions of their society. Algren and Taka develop an unspoken affection for each other.
One night, a group of ninja infiltrate the village and attempt to assassinate Katsumoto. Algren saves Katsumoto's life, and then helps defend the village, concluding that Omura must have hired the ninjas. Katsumoto requests a meeting with Emperor Meiji in Tokyo. He brings Algren, intending to release him. Upon arriving in Tokyo, Algren sees that the Imperial Army has become a well-trained and fully equipped force led by Bagley. Katsumoto, to his dismay, discovers that the young and inexperienced emperor has become a puppet of Omura. At a government meeting, Omura orders Katsumoto's arrest for carrying a sword in public and tells him to perform seppuku the next day to redeem his honor. Meanwhile, Algren refuses Bagley's offer to resume command of the army, prompting Omura to send assassins after him, but Algren kills the assailants and then assists the samurai in freeing Katsumoto. During the rescue, Katsumoto's son Nobutada is mortally wounded, his sacrifice allowing the others to escape.
As the Imperial Army marches to crush the rebellion, a grieving Katsumoto contemplates seppuku. Algren convinces him to fight and joins the samurai in battle. The samurai use the Imperial Army's overconfidence to lure them into a trap; the ensuing battle inflicts massive casualties on both sides and forces the imperial soldiers to retreat. Knowing that imperial reinforcements are coming, and defeat is inevitable, Katsumoto orders a suicidal cavalry charge on horseback. The samurai withstand an artillery barrage and break through Bagley's line. Algren kills Bagley, but the samurai are quickly mowed down by Gatling guns. The imperial captain, previously trained by Algren and horrified by the sight of the dying samurai, orders the soldiers to cease fire, outraging Omura. Katsumoto, mortally wounded, commits seppuku with Algren's help as the soldiers kneel in respect.
Later, as trade negotiations conclude, the injured Algren interrupts the proceedings. He presents the emperor with Katsumoto's sword and asks him to remember the traditions for which Katsumoto and his fellow samurai fought and died. The emperor realizes that while Japan should modernize, it can't forget its own culture and history. He rejects the trade offer, and when Omura protests, the emperor tells him he has done enough and that he will seize Omura's fortune to distribute among the people. Omura claims to be disgraced, and the emperor offers him Katsumoto's sword, saying that if the shame is too great, Omura should commit seppuku. Omura relents and leaves.
While various rumors regarding Algren's fate circulate, Graham concludes that Algren had returned to the village to reunite with Taka.
