The final judging took place at the opening of the 41st Tokyo International Motor Show.
The first Prius was also awarded Japanese Car of the Year back in 1997-1998.
The Prius scored a total of 433 votes, beating its closest competitor by only 42 votes. This being one of the closest outcomes on record.
The votes took place with a live final tally on the media day of the Tokyo Show which included 61 journalists and industry representatives.
Figures from the Japan Automobile Dealers Association (JADA) show the Toyota Prius is Japan’s best-selling car and has been for the past five months.
In September it reached 31,758 sales making up 10.8 per cent of total sales in Japan.
The Prius arrived in Australia in the middle of 2009, with a 21 per cent increase in power and an 11.3 per cent drop in fuel consumption to just 3.9 litres per 100 km.
The combination of the 1.8 litre petrol engine with the electric motor gives the Prius 100KW of power. 89g per kilometer of CO2 is all the Prius emits which is the lowest amount in Australia.
1.3 million Prius have been sold world wide with 13,000 sold in Australia.
Dave Buttner, senior executive director Toyota Australia said "The acknowledgment of third-generation Prius by Japanese COTY is endorsement of the shift to hybrid."
"Toyota has led the development of hybrid and its exhibit at this year's Tokyo Show is clear indication of future commitment.”
"Prius has been Japan's best-selling vehicle domestically this year, based on customer realisation of the compelling need to save fuel and contribute to environmentally well being."
A range of Toyota hybrids and electric cars were on show including a plug-in version of the Prius as well as an all-electric concept city car.
This week also saw the release of a larger hybrid petorol-electric car called Sai for the Japanese domestic market.
Toyota Australia will sell the Hybrid Camry here next year.