During the Nara period (Japan 710-794) tea plants were grown in Japan and mainly consumed by priests and noblemen as medicine. Toward the end of the Tang dynasty in China, the drinking of tea was going through a transformation from medicine to beverage, but due to deteriorating relations between the two countries this transformation did not reach Japan till much later. The Japanese were forced to mold and cultivate their own traditions and culture around the tea. Tea was a rare and valuable commodity from the Nara period to the Heian period (794-1192) so rules and formalities were based on this concept. Had tea been native to Japan or more readily available, it is almost certain that the tea ceremony would not have been created.

In 1187, during the Kamakura period,  Myoan Eisai, a Japanese priest, traveled to China to study philosophy and religion. When he came back, he became the founder of Zen Buddhism and build the first temple of the Rinzai sect. He also took tea seeds back with him, which eventually produced tea that was of the most superb quality in all of Japan. It is said that he was the first one to cultivate tea for religious purposes, unlike others before him who grew tea for medicinal use only. He was also the first to suggest and teach the grinding of tea leaves before adding hot water. A Sung emperor named Hui Tsung, referred to a bamboo whisk used to whisk the tea after hot water was poured over it in his book Ta Kuan Cha Lun (A General View of Tea).

These two methods formed the basis for the tea ceremony as we know it today. Eisai was the first to write a treatise on tea in Japan. In his treatise, Kissa Yojoki (Tea drinking is good for health) Eisai suggested that the drinking of tea had certain health benefits and cures for; loss of appetite, paralysis, beriberi, boils and sickness from tainted water. According to him it was a cure for all disorders, so this perhaps was the main reason that the Tea Ceremony gained such popularity. The samurai class embraced it wholly and caused even greater popularity of the ritual preparation of green tea.

During the Muromachi period (in the 15th century) imported goods from China ('karamono' ) were used as ornaments in living rooms and as tea utensilsplaced on a large utensil stand (Daisu). When people of other classes became interested in the tea ceremony enjoyed by the Samurai class, they started having small tea gatherings in smaller and less lavish rooms which were appropriate to their status. One of the best designers of smaller tearooms was a Zen priest called Murata Shukou. He later became known as the father of the tea ceremony because the etiquette and spirit of tea were originated by him. At the age of eleven he entered into priesthood at Shoumyou and later at Daitoku-ji. After this, he spend the rest of his days in his tea room in Nara to perfect the tea ceremony, and give lessons to anyone interested in learning the art. To all his students he tried very hard to instill the true spirit of simple, Zen-inspired tea. Another important procedure initiated by Shukou, was that he himself would serve the tea to his guests. He preferred the intimate and personal atmosphere of a small room which could fit five to six people. The four-and-a-half-mat room that he had devised to create a more tranquil atmosphere during the tea ceremony had its origins in the Zen philosophy he had studied in Kyoto at Daitokuji Temple. Shukou outlined his own basic concept of the art of Chanoyu and his personal philosophy of aesthetics. He wrote about the idea of refined simplicity, or Kakeru, and about the importance of understanding the aesthetic qualities of sober-colored pottery from Bizen and Shigaraki. From his letters it can also be learned that he took great pains to study the best method of combining Chinese and Japanese tea utensils.

The Japanese tea ceremony began to evolve its own aesthetic, in particular that of "sabis" and "wabis" principles. "Wabi" represents the inner, or spiritual, experiences of human lives. Its original meaning indicated quiet or sober refinement, or subdued taste characterized by humility, restraint, simplicity, naturalism, profundity, imperfection, and asymmetry. It emphasizes simple, unadorned objects and architectural space, and celebrates the mellow beauty that time and care impart to materials."Sabi", on the other hand, represents the outer, or material side of life. Originally, it meant worn, weathered or decayed. Particularly among the nobility, understanding emptiness was considered the most effective means to spiritual awakening,while embracing imperfection was honoured as a healthy reminder to cherish our unpolished selves, here and now, just as we are - the first step to "satori" or enlightenment.

During the Azuchi Momoyama period (in the 16th century) Sen no Rikyu (1522 – 1591) gave chanoyu its final form. For more than 400 years since that time, chanoyu has been a part of Japanese peoples' lives, giving them spiritual richness and pleasure.

Excerpts from:
http://japanese-tea-ceremony.net
http://www.omotesenke.com/english
http://en.wikipedia.org/wiki/Japanese_tea_ceremony