The location of the new capital has not yet been decided and could take up to 10 years to finalise, planning minister Bambang Brodjonegoro said, citing Brazil and Kazakhstan as examples.
One of the contenders for the new capital city is Palangkaraya in central Kalimantan province on the island of Borneo, state news agency Antara reported earlier this year.
Authorities there had prepared 300,000 hectares of land in case it is chosen as a new government hub, the agency said.
The current capital, Jakarta, is home to more than 10 million people, but about three times that many people live in the surrounding towns adding to the area’s severe congestion.
Mr Brodjonegoro put the annual economic loss due to traffic congestion in Jakarta at 100 trillion rupiah (£5.4bn).
The low-lying capital is also prone to flooding and is sinking because of over-extraction of ground water.
President Joko Widodo took into account the fact that nearly 60 per cent of Indonesia’s 260 million people live in Java and economic activities were concentrated there, Mr Brodjonegoro said.
The president promised to spread economic development more evenly outside Java during his recent election campaign.
The planning minister told reporters after a cabinet meeting on Monday: “The president chose to relocate the capital city to outside of Java, an important decision.”
At the opening of his cabinet meeting, Mr Widodo stressed the need for new thinking about the future.
“We want to think in a visionary way for the progress of this country and moving the capital requires thorough and detailed preparation,” he said.
Mr Brodjonegoro did not estimate the cost of moving the capital but said the president had ordered the finance ministry to come up with a financing scheme that allowed private investors to be involved.
Reuters contributed to this report
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies