Preserved ratio impaired spirometry (PRISm) is associated with an increased mortality rate; however, its characteristics have not been clearly identified in Japan. This cross-sectional study of community-dwelling older adults compared physical function between people with PRISm and those with no respiratory issues, from 2014 to 2019. We collected demographic data through interviews and measured respiratory and physical functions. We included 668 older adults (male, 23.5%; mean age, 72.8 ± 5.6 years); the prevalence of PRISm was 12%, while the prevalence of obstruction was 6.9%. Propensity score matching was used to identify control subjects with normal spirometry (n = 80) while minimizing the effects of confounders during comparisons with the PRISm population (n = 80). Compared with community-dwelling older adults with normal lung capacity, older adults with PRISm had a lower forced vital capacity (%FVC; 68.7 ± 9.1% vs. 92.5 ± 12.7%, p < 0.001), lower core muscle endurance (sit-up test: 6.7 ± 5.8 vs. 8.7 ± 6.0, p = 0.032), and a longer one-leg stance duration (52.4 ± 41.1 s vs. 36.4 ± 34.1 s, p = 0.008). In multivariable logistic regression, %FVC and increased one-leg stance were independent predictors of PRISm status. The prevalence of PRISm among community-dwelling elderly Japanese exceeds that of obstructive lung disease and is associated with reduced %FVC and better performance on balance testing.