Health Minister Kato Katsunobu made the announcement on Thursday.
Japanese authorities classify infectious diseases using a five-point severity scale. COVID-19 is currently in the second-highest tier, and flu is in the lowest.
Level 2 allows for the implementation of strict measures to prevent a disease from spreading, just like the restrictions imposed on people's movements over the past few years.
Japanese authorities will no longer take such measures when the decision to reclassify COVID-19 takes effect.
The change also means more medical facilities will be able to accept coronavirus patients.
On the financial front, expenses such as coronavirus tests and outpatient care will no longer be covered by the state coffers.
But the government will still pay for vaccinations until further notice.
Kato initially proposed the change in late January at a task force meeting on the pandemic with Prime Minister Kishida Fumio and other Cabinet members.
Kato urges public to stay vigilant
At a press conference on Thursday, he said the decision was formalized after consulting with a team of scientific experts.
"We are entering a new phase of the pandemic, and taking a significant step toward a return to normality," said Kato, while also warning that the virus will not suddenly disappear.
Kato stressed that the ministry will not hesitate to review the decision if circumstances change for the worse, such as the emergence of a more potent strain of the virus.
Kato called on the public to continue taking basic measures together with medical institutions, elderly facilities and local governments.
And he said we should still give extra consideration to people who are at high-risk of developing serious symptoms.
Expert calls for caution
Tokyo Medical University Hospital Professor Hamada Atsuo also says we should not let down our guard.
He points out that coronavirus cases have been rising in the past few weeks amid a period of heightened travel, adding that more people are deciding not to wear masks.
Hamada also says immunity gained though vaccines and past infection is generally waning.
Looking ahead, he says we should be cautious about a major outbreak in summer during the nation's annual Bon holiday season, and also in November and December.
Self-isolation period shortened
Under the new classification, the government can no longer legally tell infected people to stay at home. But authorities will recommend a self-isolation period of five days.
Currently, those who test positive are generally required to isolate for at least seven days, plus a 24-hour period showing no symptoms. Asymptomatic people should isolate for at least five days.
Professor Hamada agrees that the isolation period should be limited to five days. After that, he says people should wear a mask for about 10 days to avoid infecting others.