This study evaluates efficiency of forest management in Japan. Our results show that efficiency of forest management decreases over 25 years period from 1975-2000 on average. The study indicates a substantial variation in efficiency across prefectures with a potential for output saving in the range of forty percent on average. Our econometric results seem to support the hypothesis that government subsidies had an adverse effect on economic performance of forestry sector. More subsidized prefectures were found to exhibit statistically significantly lower levels of efficiency.