A decade of sluggish economic growth, concluding with the sharpest recession since the Second World War, has underlined the need for Japan to develop a new growth model. Such a model should restore public finances and long-term growth while preserving environmental quality and ensuring a sustainable use of natural resources. This paper assesses Japan’s progress in moving towards such an environmentally friendly growth pattern. It summarises Japan’s achievements and challenges in decoupling environmental pressures from economic performance. It analyses the use of market-based instruments, such as environmentally related taxes and charges and emissions trading schemes, to meet environmental and economic objectives, as well as steps taken to remove environmentally harmful subsidies. The level of integration of environmental concerns in Japan’s response to the economic crisis and in its long-term growth strategy is also analysed, particularly the policy mix used to take advantage of the growth and jobs opportunities arising from eco-innovation and the environmental goods and services sector. This Working Paper relates to the 2010 OECD Environmental Performance Review of Japan (www.oecd.org/env/countryreviews/japan).