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"Way of Fragrance"; 香道; Kōdō is the art of appreciating Japanese incense, and involves using incense within a structure of codified conduct. Kōdō includes all aspects of the incense process, from the tools, to activities such as the incense comparing games kumikō (組香) and genjikō (源氏香). Kōdō is counted as one of the three classical Japanese arts of refinement, along with ikebana for flower arrangement, and chadō for tea and the tea ceremony.

The word 香 kō is written with the Chinese Kangxi radical 186, which is composed of nine strokes (although it can be expanded up to 18 strokes 馫). Translated, it means "fragrance"; however, in this context, it may also be translated as "incense". The word 道 dō (written with the same character as Chinese tao/dao) means "way", both literally (street) and metaphorically (a stream of life experience). The suffix 道 generally denotes, in the broadest sense, the totality of a movement as endeavor, tradition, practice and ethos. In the search for a suitable term, translations of such words into English sometimes focus on a narrower aspect of the original term. One common translation in context is "ceremony", which entails the process of preparation and smelling in general, but not a specific instance. In some instances, it functions similarly to the English suffix ism, and as in the case of tea (chadō/sadō 茶道), one sees teaism in early efforts to illustrate sadō in English by focusing on its philosophy and ethos. Conversely, the English phrase the way of X has become more productive.

In kōdō, a small piece of fragrant wood is heated on a small Mica plate (Gin yo), which is heated from below by a piece of charcoal that is surrounded by ash. All this is held in a small ceramic censer that can look like a cup. It is not usual for wood or incense sticks to be burned because that would create smoke; only the essential aromatic oils should be released from the wood through the heat below it. Aloeswood, also known as agarwood (沈香 jinkō), is produced in certain parts of southeast Asia such as Vietnam. The trees secrete an aromatic resin, which over time then turns into kōboku (香木). One particular grade of kōboku with a high oil content and superior fragrance is called kyara (伽羅). Another important material is sandalwood (白檀 byakudan), which originates primarily from India, Indonesia, southern China or other parts of southeast Asia. Sandalwood trees need around 60 years to produce their signature fragrance that can be deemed acceptable to be used for kōdo. Other materials used are cinnamon bark (桂皮 keihi), chebulic myrobalan (诃子 kashi), clove (丁子 choji), ginger lily (sanna), lavender, licorice (甘草属　kanzō), patchouli (廣藿香 kakkō), spikenard (匙葉甘鬆 kansho), camomile, rhubarb (大黄 daioh), safflower (紅花 benibana), star anise (大茴香 dai uikyo) and other herbs. Shell fragrances (貝香 kaikō) and other animal derived aromatic materials are also used. Raw materials such as agarwood are becoming increasingly rare due to the depletion of the wild resource. This has made prime material very expensive. For example, the cost of lower grade kyara is about 20,000 yen per gram. Top quality kyara costs over 40,000 yen per gram, or many times the equivalent weight of gold (as of late 2012). Though it can only be warmed and used once for a formal ceremony, it can be stored for hundreds of years. If the particular piece of incense wood has a history, the price can be even higher. The highest regarded wood, Ranjyatai (蘭奢待), dates back to at least the 10th century and is kyara wood from Laos or Vietnam, and was used by emperors and warlords for its fragrance. It is said to contain so much resin that it can be used many times over. The wood is kept at the Shōsōin treasury in Nara, which is under the administration of the Imperial Household. The high costs and difficulty in obtaining acceptable raw material is one of the reasons why kōdō is not as widely practiced or known compared to the art of flower arrangement or the tea ceremony. One of the oldest traditional incense companies in Japan is Baieido, founded in 1657 with roots going back to the Muromachi period. Other traditional and still operating companies include Kyukyodo (1663, Kyoto) and Shoyeido, founded in 1705. Nippon Kodo is also a major supplier of incense material.

The art of enjoying incense, with all its preparatory aspects, is called monkō (聞香), which translated means "listening to incense" (although the 聞 Kanji also means "to smell" in Chinese). The aim is to let the aroma of the material infuse the body and soul and "listen" to its essence in a holistic manner, as opposed to just reducing it to smelling. Monkō has been depicted in Japanese art, with a well known depiction by the artist Shinsui Itō (1898–1972). Participants sit near one another and take turns smelling incense from a censer as they pass it around the group. Participants comment on and make observations about the incense, and play games to guess the incense material. Genjikō is one such game, in which participants are to determine which of five prepared censers contain different scents, and which contain the same scent. Players' determinations (and the actual answers) are recorded using symbols in kō no zu(香の図). The kō no zu for Genjikō is Genjikō no zu(源氏香の図). The geometric pattern of these are also used as mon (called as Genjikō mon(源氏香紋)), for decoration in a number of other areas such as kimono, Japanese lacquerware and Japanese pottery.