Since the “Project of Accepting 100,000 Students from Abroad” was proposed by the Japanese government in 1983, the number of international students in Japan has increased dramatically to reach ten times the level of 23 years ago. Yet, despite the enhanced opportunities for international and local Japanese students to interact, there is evidence that meaningful intercultural interactions between the two groups have not taken place consistently (Hicks, 1988; Jou & Fukuda, 1995; Tanaka, et al., 1997). The aim of this research was to develop a better understanding of the process of intercultural relational development between international and Japanese students in a Japanese context. More specifically, the research aimed to identify elements which facilitate or inhibit the two groups' intercultural relational development over a period of time, the nature of socio-emotional challenges that are experienced along the way, and how these are interpreted by students themselves. Several interpersonal relationship theories, cross-cultural communication theory, and research on cross-cultural and intercultural relational development were reviewed to form the conceptual background of the research. In combination, they contributed to provide a holistic approach to studying the complex dynamic, interactive and reciprocal nature of intercultural relational development. Using naturalistic inquiry at a single site over a period of nine months, an empirical study investigated the intercultural relational development taking place among a small number of Australian and Japanese students who lived at the International House of a private Japanese university. Research methods included four semi-structured interviews with each participant, the use of various stimulus materials, including critical incidents to elicit multiple interpretations, as well as the researcher's continuous field observations. The study revealed some of the factors that facilitated and alternatively inhibited social interactions between the two groups, at different stages of their relational development. Students' spontaneous accounts of critical incidents, combined with their subjective interpretations of the same incidents provided insight into the socio-emotional challenges experienced by students in the process of intercultural relational development. Whereas most students' accounts and interpretations could be related to cultural background and experience, there was also evidence that some strategies for developing intercultural relationships as well as some interpretations of socio-emotional challenges were related to gender rather than cultural background. Unexpectedly, the research also found that social drinking was perceived by many students, across the two groups, as a facilitating factor at the early stage of intercultural development. Overall, the empirical study revealed that Japanese students experienced more socio-emotional challenges than Australian students. Differences in sense of humor and in perceived appropriateness of introducing conversational topics of a private nature were given special attention as these appeared to present major socio-emotional challenges for Japanese students. Both cultural background and gender seemed to have an impact on students' interpretations of these challenges. The thesis concludes with some suggestions for future research and for how intercultural learning between international students and host nationals could be enhanced in the Japanese context. Finally, the study makes a unique methodological contribution to research related to international students, through the use of a longitudinal design, a focus on situated experiences and socio-emotional challenges, and more generally, through a reciprocal approach to the study of intercultural relational development in the context of the internationalisation of higher education.