Mud Wall is external wall filling dry mud between structural materials. Mud Wall has been employed as one of the major building components of traditional wood frame houses in Japan. The Mud Wall has proper performances in terms of heat and moisture capacity and fireproof, whereas thermal insulating performance is inferior to general thermal insulation materials such as glass wool, XPS and so on. In this paper, construction method filling an insulation material outside the mud wall layer is proposed for the mud wall houses in mild climate region. The hygrothermal performance of this method was studied by laboratory experiments and numerical simulations in terms of internal condensation issue. Additionally, impacts of the installation of insulation materials on energy conservation and indoor environments were discussed by heat load simulations. The results are as follows; 1) When construction method filling an insulation material in the cavity is adopted, the concealed condensation dose not occur. 2) The annual heating and cooling load of the mud wall house, of which wall is insulated is considerably lower than the existing mud wall house, but improvement of envelope airtightness is necessary to comply with the Japanese next generation energy saving standard.