Aim To investigate whether positive affect independently predicts a lower risk of functional decline among community‐dwelling older Japanese. Methods A 2‐year prospective study was carried out among 505 residents of Tosa Town aged 65 years and older without disability in carrying out basic activities of daily living (BADL) at baseline. Positive and negative affect was measured using the 15‐item Geriatric Depression Scale, which includes items that reflect positive affect, as well as items that reflect negative affect. Information on functional ability, sociodemographic factors and medical conditions was obtained using a self‐administered questionnaire. Results A total of 72 (14.3%) participants reported a decline in BADL at the 2‐year follow up. The sum‐score of the positive items was significantly associated with a lower risk of functional decline (OR 0.78, 95% CI 0.64–0.97), after controlling for potential confounding factors. Of the five positive items, three items (feeling satisfied with life OR 0.49, 95% CI 0.25–0.95; feeling happy most of the time OR 0.50, 95% CI 0.25–0.99; and feeling full of energy OR 0.46, 95% CI 0.22–0.95) were significantly associated with functional decline after adjusting for confounders. These associations were also independent of negative affect. In contrast, none of the negative items predicted functional decline after controlling for confounding factors. Conclusions Positive psychological well‐being, specifically the feeling of satisfaction with life, happiness and energy, might have a favorable effect on the maintenance of functional ability, regardless of negative affect. Geriatr Gerontol Int 2012; ●●: ●●–●●.