Taiko became a popularized art form during Japan’s feudal era, when Buddhist monasteries supported troupes of actors that gave rise to the Noh theatre. Noh performances were accompanied by taiko, yielding drums that would become the standard for modern taiko. Another theatre form to enjoy increased attention during the feudal era was the kabuki theatre, which introduced several different kinds of taiko drums to accompany the dramas on stage3.
Taiko also played a major role in folk music and at festivals throughout Japan, accompanied by a wooden flute and a small hand drum called tsutsumi. It is now a mainstay during Obon season, as one of the major instruments played at bon dances, and has become a performance art in and of itself.
References
1. http://www.taikohawaii.com/taiko_history.html
2. http://www.taikocenter.com/history-oftaiko.html
3. http://web-japan.org/kidsweb/master/taiko/1-his01.html