Outside of Japan, wasabi is known nearly exclusively in the form of a moist blob of green material served to accompany sushi or sashimi. In Japan, it has a somewhat wider usage, sushi being after all something of a regional food, but the root is so expensive that it is principally used similarly, i.e. with raw fish.
To prepare fresh wasabi, simply grate the trimmed end of the root--trim the leaf end, not the root end--on a fine grater. Many prefer a sharkskin or ceramic grater over metal, though it is not entirely clear whether this is pure traditionalism or has an objective culinary value. Fresh wasabi should be used within 2-3 days of purchase. A cut root should be wrapped in slightly damp paper towel or cloth and stored in the refrigerator. Do not pre-grate the root: its flavor declines very rapidly with oxidation.
True wasabi costs roughly $5 per root, for the smallest and least quality, at high season, in Japan. Larger, high-quality roots begin around $15-$20 apiece, and somewhat more out of season. A smallish root, ground, makes about 7-10 times the amount one usually gets with a tray of sushi in the United States.
The overwhelming majority of wasabi served in restaurants, in Japan and elsewhere, is not actually wasabi. It is a mixture of horseradish, mustard, and green dye. The flavors are very similar, but compared side-by-side strikingly different. Wasabi's flavor is somewhat milder and more floral in character; some say they can taste a leafy-green sort of flavor, which is plausible since the root is of the same family as cabbage (brassica). The green horseradish-mustard mixture has the advantages of being inexpensive and shelf-stable: there is little difference between reconstituted powdered mix and fresh, whereas fresh wasabi loses flavor extremely quickly and stores badly.
Given the expense of true wasabi one may safely assume that no "wasabi-flavored" packaged foods (peanuts, peas, mayonnaise, etc.) have anything to do with wasabi.
Manners and Propriety
In some circles, it is held that wasabi should never be mixed into a paste with soy sauce, but used separately. Indeed, in some cases, diners have been expelled from restaurants for making a paste like this. Setting aside pure snobbery and affectation, what's the point?
One view: Since true wasabi has a distinct flavor that is subtly different from the usual green mush, it is in a sense akin to the fish served at a very high-quality sushi restaurant (or indeed any top-notch Japanese establishment). If you simply dump it into soy sauce, some feel, you are saying that you can't really tell the difference anyway. It's as though you dumped ketchup and A-1 sauce onto everything on your plate at a high-end French restaurant.
Another view: There are ways to eat certain kinds of Japanese food that have become celebrated for themselves, not for the food as such. Some people feel you ought to obey these rules in order to have a properly Japanese (i.e. exotic) experience. On this view, most of the sushi chefs making a fuss about dunking wasabi into soy sauce are merely putting on a show. To be honest, most of the fuss is made by people who don't realize that the green blob is dyed horseradish and not wasabi in the first place.
A median account: If both sides are equally right and wrong, the diner ought to follow some basic rules, in the interest of best flavor and dining experience (all this relates to eating at the bar -- you can eat however you want at a separate table):
At least in theory, no sushi chef who is really serious about the taste of the food ought to be angry if you are thinking this hard about when and how to use your wasabi.
- Use wasabi separately from soy sauce, and in moderation. If wasabi is necessary to cover up the flavor of what else you are eating, you are eating in the wrong restaurant -- which could be taken more than one way
- Pre-seasoned sushi (maki rolls, some nigirizushi, etc.) should be tasted with only a hint of wasabi, after which you may add more if you feel it's needed
- Dunk only the topping of nigirizushi into soy sauce, having previously added a bit of wasabi if you like; do not dunk the nigiri (rice cake) into the soy. Some Japanese sushi chefs feel that this is the only absolute rule
- Season sashimi lightly: it is much more subtle than sushi, and requires thought
- If sashimi is served with more than one dipping sauce (e.g. ponzu and soy), consider whether wasabi is called for in both cases: usually ponzu calls for a lot less, because it is complex and acidic
- If the chef makes a suggestion about using wasabi with a particular item, it is both wise and polite to take this into account: he knows the ingredients he is working with