China and Japan had for months been vying to build a new railway in Indonesia, as Asia's two biggest economies increasingly battle for influence across the region.
Indonesia had originally invited bids for its first high- speed railway between the capital Jakarta and the mountain- fringed city of Bandung, but unexpectedly changed plans this month and opted instead for a cheaper and slower option on the same route.
China and Japan submitted new proposals. But Japan's top government spokesman Yoshihide Suga said an Indonesian government envoy had informed him today that Tokyo's bid had been rejected.
"I can't understand that at all. I frankly told the envoy that it was extremely regrettable."
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He said China's new proposal did not involve the Indonesian government taking on any financial burden, or guaranteeing the project, adding: "It is an unthinkable proposal for our country."
The Indonesian government did not immediately confirm the decision. However, State-Owned Enterprises Minister Rini Soemarno suggested the Japanese bid had lost.
"The government stressed that (the project) should not have government funding nor a guarantee - Japan's proposal asked for a government guarantee," she said.
Tokyo seemed destined to build the high-speed rail line until Jakarta announced in April that China had entered the race with a counter-offer.
Japan's loss came despite its reputation as a world-class train maker.
The country is famous for its legendary shinkansen bullet trains which for decades have whizzed between cities without a single fatal accident.
China has countered this by arguing it has built thousands of kilometres of high-speed railway in the 12 years since it began constructing bullet trains. But its safety standards have come under scrutiny - a 2011 crash killed at least 40 people and injured about 200.