In 1958, a university professor and his two daughters, Satsuki and Mei, move into an old house in rural Japan to be closer to the hospital where his wife is recovering from an illness. The daughters find that the house is inhabited by tiny animated dust creatures called soot sprites — small house spirits seen when moving from light to dark places. When the girls become comfortable in their new house and laugh with their father, the soot spirits leave.

While she is playing outside one day, the younger daughter, Mei, sees two white, rabbit-like ears in the grass. She follows the ears under the house where she discovers two small magical creatures, who lead her through a briar patch, and into the hollow of a large Camphor Laurel tree. She meets and befriends a larger version of the same kind of spirit, which identifies itself by a series of roars she interprets as "Totoro" (in the Japanese original dub it stems from Mei's mispronunciation of the word for "troll", tororu). Her father later tells her that this is the "keeper of the forest".

One rainy night the girls are waiting for their father's bus and grow worried when he does not arrive on the bus they expect him on. As they wait, Mei eventually falls asleep on Satsuki's back and Totoro appears beside them, allowing Satsuki to see him for the first time. He only has a leaf on his head for protection against the rain, so Satsuki offers him the umbrella she had taken along for her father. Totoro is delighted at both the shelter and the sounds made upon it by falling raindrops. In return he gives her a bundle of nuts and seeds. A bus-shaped giant cat halts at the stop, and Totoro boards it, taking the umbrella. Shortly after, their father’s bus arrives.

The girls plant the seeds. A few days later they awaken at midnight to find Totoro and his two miniature colleagues engaged in a ritual dance around the planted nuts and seeds. The girls join in, whereupon the seeds sprout and then grow into an enormous tree. Totoro takes his colleagues and the girls for a ride on a magical flying top. In the morning, the tree is gone, but the seeds have indeed sprouted.

Mei, believing her mother's condition has worsened, sets off on foot to the hospital and gets lost. Desperate to find her sister, Satsuki returns to the camphor laurel tree and pleads for Totoro's help. Delighted to be of assistance, he summons the Catbus, which rescues Mei, then whisks her and Satsuki over the countryside to see their mother in the hospital. The girls perch in a tree outside of the hospital to discover that she is doing well. They deliver an ear of corn that Mei believes will speed her mother's recovery, and then return home on the Catbus. When the Catbus departs, it fades away from the girls' sight.

Mei is a 5 year old girl. She has a very curious mind and not afraid of being adventurous. Although Mei is a very happy girl most of the time, there are times when the absence of her mother strikes her. Fortunately, Mei has her older sister Satsuki to whom she looks up to. Mei was the first to see Totoro and when she got lost while trying to go to her mother, it was only because of Totoro and Neko Bus' help that Satsuki was able to find her.

Although Satsuki is only a 11 years old girl, she has had to face greater responsibility ever since her mother was indefinitely admitted into the hospital for tuberculosis. She is a very open-minded person and possess the innocence of children as shown by her quick acceptance of Totoro and her ability to see it. Satsuki is a very outgoing and happy person and is able to make friends and adapt quickly to her surroundings. When she first arrived at her new home, Satsuki did not quite hit it off with Kanta right away. However, Satsuki soon learns Kanta is actually a very nice person and they eventually become good friends.

Mr. Kusakabe is Satsuki and Mei's Father. He loves his daughters very much and often takes part in the girls games and encourage their imaginations. He is a university professor.

Totoro is the guardian of the forest and can only be seen by children and can appear or disappear as he wishes. He possess special ability such as being able to make plants grow, fly in the sky, and call Neko Bus.

Neko Bus (The Cat Bus) travels at the speed of light. Being connected to nature, when Neko Bus wants to, the trees will part for him to clear his path. Neko Bus can also run on tree tops, or on phone wires and no one would even be aware of his presence except perhaps sensing a small gust of wind. The reason being is that it posses the power to be invisible.

Chu Totoro and Chibi Totoro are Totoro's companions. They are smaller versions of Totoro and are also guardians of the forest.

Susa-ataris are little black creatures which live in quiet and dark places. They run and hide at the first sign that there are people present, and fly away to find a new home when they can no longer have the dark and quiet that they like so much.