This paper describes a novel JPEG 2000 variable bit rate (VBR) encoding system for digital cinema that uses visually lossless viewing distance as the image quality metric to provide true constant perceived quality. In this approach, the wavelet coefficients are quantized using a human visual system model so that there are no detectable compression errors when a movie is viewed at the specified viewing distance (or at any greater distance). The compressed codestream includes only the minimum information that is needed to ensure visually lossless quality, so coding efficiency is high. Compression times are also significantly reduced, as compared to typical VBR systems, which results in a more efficient workflow. These benefits are achieved while maintaining full compatibility with the Digital Cinema Initiatives (DCI) compression specifications.