Smith, 37, plays for Tokyo-based side Suntory Sungoliath in the Top League, with the 111-cap Australia international one of the leading names currently in Japanese club rugby.
According to the Yomiuri Shimbun newspaper, sources close to the police investigation claim that Smith was under the influence of alcohol when he allegedly refused to pay for a taxi fare rough around 10,000 yen (£65). He is then accused of running from the vehicle and being chased multiple times, before punching the driver.
Smith’s club confirmed his arrest with the flanker reported to have denied the allegations.
“It is true that George Smith, under contract to our rugby team, has been arrested,” said Suntory Holdings Ltd, the company that owns Sungoliath.
“We issue a heartfelt apology to the victim, as well as other related people, as well as to the many people who have worried and been caused problems by this.”
Local police were not available for comment.
Smith, a Rugby World Cup finalist with Australia in 2003, made his professional debut in 2000 with Super Rugby side ACT Brumbies, and after retiring from international duty in 2010, Smith had spells with Toulon, Stade Francais and Lyon in France as well as Wasps in the Premiership, and was drafted in by England head coach Eddie Jones to offer his advice on defensive coaching in 2016.