Shrinking Women, abbreviated SW, is a sexual fetish (a form of microphilia/macrophilia) and a corresponding fiction genre that deals with the topic of shrinking adult women down to the size of a doll. In Japanese, it is known as Koonago (こおなご).
|“|| I really wish that you were smaller
Not just small but really really short
So I could put you in my pocket
And carry you around all day
|— Milow - You and me|
"Basically, the fantasy centers around women being reduced in size. Everyone seems to have their own favorite height. Personally, I like around three inches, where they fit neatly in the palm but aren't so small you can't appreciate them. Others like them smaller, but the majority seem to enjoy seeing women at Barbie doll height. This allows them to be used in a variety of sexual ways I won't elaborate on here (it's part of the fantasy, and there's enough material out there you'll find out what I mean soon enough...I won't spoil it). Anyway, the point is, there's no specific size that seems to be favored. You may like a woman at a certain size, but in general a SW fan can appreciate a tiny lady at any height, simply for the fact that she's really small." 
In the fantasy, the shrinking is done e.g. by means such as future technology (science fiction) or magic (fantasy). The shrunk women are then treated as if they were living dolls. Popular subjects include holding them captive, dressing and undressing them, performing sexual acts with them (e.g. oral sex bukkake), treating them like babies (adult baby/diaper lover scenarios), humiliating them, punishing them (e.g. spanking or BDSM-style torture), etc. What makes the fiction so attractive is the shrunken women's helplessness combined with beauty, cuteness and full sexual maturity.
"In fantasy terms these "tiny women" are treated as helpless and nonthreatening yet fully sexual beings, capable of being used, abused, and mistreated for erotic purposes without any risk or ability to object. Koonago fetish subgenres abound, ranging from bondage and BDSM themes (including revenge punishment against shrunken authority figures, such as former teachers), through sexual slavery to an abundance of food / eating fetishes, in which koonago people are eaten (sometimes live, sometimes cut up, sometimes prepared as sushi or another dish). Koonago are presented as sexual slaves, toys, pets, sex devices, or just as a generalized object of torment. They are often shown touching or rubbing the genitals of their owners, masters, or whomever has them locked in a jar this week." 
The person who 'plays' with such a shrunk woman can be male or female, adult, teen or child. Judging from the websites on the topic, the fetish and genre seems to be particularly popular in Japan. What makes the fetish interesting from a spanko's point of view is the popularity of punishment scenarios in which the shrunk women are given bare bottom spankings.
Perhaps the earliest example of this fantasy to appear in Japanese popular culture is Mothra (1961) a live-action special effects monster movie in the Godzilla series produced by Toho Company Ltd. This film introduces two tiny twin girls, known as the Shobijin (a.k.a. "The Little Beauties"). They are about 6 inches tall and always speak in unison. The Shobijin, we are told, are a race of little people from Infant Island located somewhere in the Pacific. They are played by Itô and Yûmi Itô.
The same twins appeared in two following films, Ghidorah, the Three-Headed Monster (1964) and Mothra vs. Godzilla (1964).
In Godzilla Versus the Sea Monster (1966), the tiny twins appear again on the island where Mothra lives. This time they are played by the singing duo Pair Bambi (Yuko and Yoko Okada).
Related: Fantasy creatures
Although fairies are not shrunken women, visually there is not so much difference between shrunken women and fairies — the main difference being that a fairy has wings, can fly, and possibly do other stuff such as magic. So 'kinky' fairy scenes have much in common with 'kinky' SW scenes. A fairy might be spanked, restrained, erotically stimulated, etc. A well-known example of this genre is the erotic manga Bondage Fairies.
- the drawings of Toyogub (on the site Koonago Factory)
- the edited photos of MrCarl (on the site Little Ladies)
- the edited photos of Waldo (spanking)
- the stories of DollShrinker
- the stories and art of Jitensha
- comics by DreamTales
- the comic Gullivera by Milo Manara
- Example drawing (f/F spanking by Toyogub)
- Example drawing (f/FF spanking by Toyogub)
- Fotomontages -- Edited photo comic with spanking (M/F) by Waldo
- Example edited photo (F/F spanking by MrCarl)
- Sample non-spanking photo
- Jitensha's SW Media Gallery by Jitensha
- DreamTales' shrinking comics and stories
- giantess and sw lovers archive
- The Minimizer's SW Site