It is possible to drive legally in Japan for up to one year on an International Driving Permit (IDP) issued by a signatory country of 1949 Geneva Convention on Road Traffic (there are 95 countries & 2 regions who have signed this (as of March 5, 2011); notable exceptions include Brazil, China, Mexico, Russia, and Vietnam) (Japan Traffic Act Article 107 Provision 2) Before 2002, an International Driver’s Permit (IDP) could be renewed repeatedly and used, with a valid overseas license, instead of formally applying for a Japanese driver’s license. But, after the law changed, the use of an IDP was limited to (Japan Traffic Act Article Number 107.2)
Individuals who are planning to live in Japan for a period of more than twelve (12) months require a Japanese driver’s license to drive legally on the road.
Regardless of the length of time spent in Japan, individuals who leave Japan on short business trips can not validate an International Driving Permit on their return to Japan. In such cases, individuals need to reside outside of Japan for three (3) months or more.
Yes, they may. Providing the permit is still valid there are no restrictions against renting a vehicle.
We strongly advise individuals to obtain a Japanese drivers license well before their International Driver’s Permit expires. Individuals who use their International Driving Permit after the expiration date, will be driving illegally. The penalties for driving without a license are severe and strictly enforced. In addition, insurance cover will be invalidated.
All applicants must apply for their license, and take their tests, within the prefecture, or city, that the individuals reside in.
The conversion process differs depending on whether an individual is required to take a written test and a driving test. For individuals who are not required to take the tests, we estimate two to three weeks. For individuals who are required to take the written test and the driving test we estimate around four to six weeks, providing that individuals pass the driving test at their first attempt.
The requirement to take the written and driving test is based on where the license was issued, not on an individual's nationality. Individuals holding licenses issued in the following places are not required to take either a written test or a road test:

Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, Monaco, Norway, Portugal, Slovenia, Spain, Sweden, Switzerland, The Netherlands, The United Kingdom, Australia, New Zealand, Canada, Taiwan, South Korea, Maryland (USA), Washington (USA ), or Hawaii (USA). 

Most EU countries have reciprocal agreements with Japan allowing individuals in possession of a valid license to convert without the need for taking a test. It is also worth noting that most US states require Japanese license holders to take a test when relocating to the U.S.