It is also the first major test of Joko Widodo, popularly known as Jokowi, who swept to office seven months ago with the promise to sweep away the corruption and inefficiency that has long been the hallmark of Indonesian politics and the way the world's 17th-largest city has been run.
The project, announced late on Thursday and which has been delayed for over two decades, would mark a rare bright spot in Indonesia's growing infrastructure bottleneck which threatens to throttle what have been record levels of investment in Southeast Asia's biggest economy.
"Jokowi has no choice but to build the MRT (Mass Rapid Transit railway) to satisfy the emerging middle class," said Marco Kusumawijaya, head of Rujak, a Jakarta-based urban planning think-tank.
"But this will not solve the traffic problems of the city in the long run because the backlog of demand for public transport here is so huge. You can't solve this with one or two inner-city (subway) lines."
Two consortia of Japanese and Indonesian state-owned companies were due to begin construction on the initial US$1.7 billion phase of the MRT later this year, Jokowi told reporters.
The Japan International Cooperation Agency has pledged to fund nearly 75 percent of the first line with a soft loan, with the Indonesian government picking up the rest.
The city of 10 million has tried various options to reduce cars on the streets. A rule in place for years which limits car using the main thoroughfare during rush hours to cars with three people is largely ineffective because "jockeys" line the roads to be extra passengers for a small payment.
There was an attempt at building a monorail in 2005, but it became mired in bureaucracy, ran out of funding and left unfinished concrete pillars dotting the business district.
Governor Widodo is seen as breathing new life into the city. A recent spree of firing and reshuffling high-level civil servants has earned him a reputation for being a strict and results-oriented leader.
When his deputy governor put a budget meeting on YouTube late last year, in which he bluntly took to task his senior officials, it attracted more than a million views.
But after seven months, Widodo has started to face criticism over delays in vital infrastructure projects that are key to improving the city's traffic and annual flooding problems.
An odd-even license plate system designed to reduce the number of cars on the streets has been pushed back six months. And the construction of a flood mitigation system has encountered several delays even as seasonal rains continue to inundate the city.
Other social assistance programs have been criticised as being rolled out too hastily. According to media, Health Minister Nafsiah Mboi recently criticised the governor's move to give free access to healthcare for the poor, saying the city's hospitals were not equipped to deal with large numbers of patients.
The governor came under more fire when two children died last month after being turned away from hospitals that were too full.
But Widodo, who ran a furniture business before turning to politics, remains hugely popular and is widely seen as a potential candidate for president, possibly in next year's election.
(Reporting By Kanupriya Kapoor, Editing by Jonathan Thatcher)