Shiwa Town, in Iwate Prefecture, has been promoting recycling-oriented town development since 2000. This paper reviews the town's woody biomass utilization and forest management system and discusses the issue of developing sustainable forest management based on a sustainable woody biomass utilization system. Shiwa's experience reveals that forest management should be an important component of an overall local woody biomass utilization system. In addition, scale factors should be considered to allow diversified management and diversified management bodies that are appropriate at scales ranging from individuals to large enterprises. Third, local economic circulation (i.e., flows of cash or cash-equivalents within the community) should be managed to enhance sustainability. Finally, energy service companies (ESCO) will play a significant role in funding and coordinating the woody biomass utilization system.