The plant will put together the carmaker's smaller models for domestic sales and export to other Asian markets, the company said.
Around 2,000 jobs will be created at the factory near Jakarta, which will have an annual production capacity of 120,000 vehicles, the company said, tripling Honda's current car output in the country.
Honda said it expects the 27 billion yen plant to come online in 2014.
"Our operations in Indonesia will take the next step to become more autonomous and play an even more important role for Honda in this region," said Hiroshi Kobayashi, chief operating officer in Asia and Oceania.
"Honda will not only build automobiles in Indonesia to meet the needs of customers here. Indonesia will serve as a key export base for Honda, for both completed vehicles and components."
Earlier this week Honda announced it would be building a new motorcycle factory in Indonesia, capable of producing about 1.1 million bikes a year to meet growing demand in the country. The new plant, operated by Honda's local joint venture partner PT Astra Honda Motor, will cost about 3.13 trillion Indonesian rupiah (US$341 million) and add 3,000 new jobs, it said.
Japanese manufacturers are increasingly looking to expand abroad, hammered at home by a shrinking, graying market and assailed in their export divisions by a strong yen.
Indonesia's economy -- Southeast Asia's biggest -- is a bright spot in a weak global environment, with figures in February showing GDP expanded 6.5% last year, spurred by strong household consumption and private investment.
Copyright Agence France-Presse, 2012