This study investigated the effect of chronic medical conditions on changes in functional capacity in Japanese older adults. Participants comprised 1,518 people aged 65-84 living in an urban and a rural community. They were interviewed to determine the presence of chronic medical conditions and assessed for functional capacity using the Tokyo Metropolitan Institute of Gerontology (TMIG) Index of Competence. Follow-up occurred 4 years later. Statistical analysis revealed that self-reported medical conditions at baseline contributed to declines in the TMIG Index over the 4 years, even after participants’ age, sex, educational attainment, and baseline TMIG level were controlled for. In the urban area, chronic obstructive pulmonary disease, diabetes mellitus, and musculoskeletal disease significantly predicted decline in the index, whereas in the rural area, hypertension and diabetes mellitus were significant predictors. These results indicate the importance of controlling chronic medical conditions in order to prevent further declines in functional capacity in older adults.