Analysts have said whoever won the bid could be a front runner for future rail projects in the region, including one linking Kuala Lumpur and Singapore.
President Joko Widodo's administration preferred China's proposal because it was less burdensome and promised a larger share of technology transfer than Japan.
"The government of China has courage not to ask for guarantees from Indonesia," Gatot Trihargo, deputy assistant for the state-owned enterprises ministry, told Reuters on Wednesday.
"While other countries like Japan and Germany request government guarantees, we cannot afford this because our budget is limited."
The high-profile contract is a victory for Chinese President Xi Jinping's "One Belt One Road" initiative to build a network of ports, trains and expressways to help expand trade, investment and influence in the region.
Read MoreChina consumer sentiment rises to highest since May 2014
For Japan, the rail project was a difficult loss, particularly after last-minute efforts by Japanese Prime Minister Shinzo Abe to provide a better offer than China.
"The Japanese government still believes our proposal was the better and most feasible one," Japanese embassy official Kijima said. "We were expecting transparency and fairness from the Indonesian government. We hope that in the future they will be more transparent and fair."
Indonesia's national planning minister, Sofyan Djalil, traveled to Japan this week to break the bad news to Tokyo, but also lobby officials on other investment opportunities.
"There are many infrastructure projects, not just trains, and many opportunities for the Japanese government to build infrastructure in Indonesia," said Indonesia's presidential chief of staff, Teten Masduki.