Abstract Understanding mechanisms stabilizing ecosystem functions, such as primary production, is crucial for forecasting global environmental responses. While biological diversity is expected to enhance stability through compensatory reactions to environmental changes, empirical evidence is lacking, especially in old‐growth forests vital for biodiversity conservation and climate change mitigation. Moreover, whether increased niche complementarity and stronger intraspecific than interspecific competition are key mechanisms promoting compensatory dynamics and stabilizing ecosystem functions in diverse forests remains unexplored. This study investigates productivity and stability in temperate old‐growth forests over 20 years at community and individual levels. Analysing 4380 trees in a 4‐ha plot in northern Japan with over 35 tree species, structural equation models evaluated the effects of biodiversity and average asynchrony in species fluctuations (compensatory dynamics) on productivity stability across 100 m2 grid quadrats. Functional traits and taxonomic diversity represented species complementarity and the insurance effect. Temporal growth correlations between conspecific and heterospecific neighbours and neighbourhood effects on growth performance indicated intra‐ and interspecific interactions at the individual level. Communities with greater stability exhibited higher diversity and asynchronous species fluctuations, suggesting that compensatory dynamics buffer community productivity against environmental variability. The inverse relationship between tree size variation and stability indicates that communities with less pronounced size and abundance hierarchies have more efficient compensatory mechanisms, ensuring stable forest functioning. The absence of negative temporal correlations in biomass production among heterospecific neighbours suggests the limited significance of interspecific competition in compensatory dynamics. Conversely, positive correlations among conspecific neighbours and their suppressed growth in dense conspecific patches highlight the importance of conspecific negative density‐dependent mechanisms in sustaining tree species diversity and ensuring stable productivity. Synthesis: The study underscores the critical role of tree species richness in stabilizing ecosystem functioning via asynchronous growth in one of the world's most diverse temperate forests. Stronger intraspecific than interspecific competition helps prevent single‐species dominance, maintaining diversity and productivity stability. Despite occasional destabilization from size‐asymmetric interspecific competition, species‐trait complementarity enhances stability by promoting overall biomass production. This study highlights the importance of overall diversity for the stability of forest productivity, with implications for nature conservation and ecosystem functionality.