They plan to get married late next year, the Imperial Household Agency said at the news conference.
Talking to the press, the couple gushed about their relationship by comparing it to that of the sun and moon.
The princess said that she will marry Kei Komuro, who was a classmate of hers at Tokyo's International Christian University.
Princess Mako said she had been preparing for the change of her rank since she was little. "Having a family still goes beyond my imagination, but I hope to make one that is warm, comfortable and filled with smiles", she said, while everyone went "aaaaah" again.
In December 2013, Komuro proposed to Mako after returning to Japan.
The engagement announcement was supposed to be made on July 8.
Princess Mako's sacrifice for love has reignited a national debate in Japan about whether women should be allowed to retain Imperial status after marriage and rise to the throne.
The announcement of the engagement of Princess Mako and Komuro sets in a motion the Nosai no Gi which is considered as the formal engagement ceremony wherein the groom also presents gifts. The couple started dating even before they went overseas and continued their communication after.
Princess Mako is expected to Wednesday next year.
The couple is expected to tie the knot in the same year Emperor Akihito will relinquish the throne.
According to NHK, the wedding between the Princess and Komuro is expected to take place next year.
Reports also suggest that the emperor might attend the wedding. This was the first time a Japanese royal became a commoner. Japan's Imperiale family was started with wartime emperor Hirohito (1901-1989) and Empress Nagako (1903-2000).
The Japanese royal family allowed the eldest Emperor's granddaughter to engage with her longtime boyfriend.
Princess Mako revealed that they talked for the first time at an event for students ahead of a study-abroad program in Shibuya, Tokyo about five years ago.