This paper investigates-whether liquidity and liquidity risk are priced in Japan. Using modified Amihud illiquidity measures, we find both cross-sectional and time series evidence that liquidity is priced in the Japanese stock market during the period 1975–2006. The evidence is largely consistent with Amihud's (2002) findings in the US market. We further employ the liquidity-adjusted CAPM proposed by Acharya and Pedersen (2005) to examine whether liquidity risk is priced in Japan. Consistent with Acharya and Pedersen's findings in the US, we show that liquidity risk is priced in the stock market, in addition to the liquidity level. These findings strengthen the confidence that liquidity is a determinant of stock returns.