The Asian side become the first from their continent to lift the World Cup after twice coming from behind in normal time to peg the USA back before going on to win in the shoot-out
Despite dominating throughout and taking the lead twice, the U.S. team could not overcome a persistent Japanese side as they missed their first three penalty kicks following a 2-2 draw after an action-packed 120 minutes at Commerzbank Arena.
Japan, who played with a heavy heart following the devastating earthquake and tsunami just four months ago, beat the United States for the first time in history dating back to 1986.
Japan's Homare Sawa was the hero of the final by scoring the equaliser from a corner in the 116th minute after Abby Wambach gave the U.S. the lead moments before the first half of extra time came to a close.
Japan goalkeeper Ayumi Kaihori stopped two U.S. penalty attempts and watched another sail over the crossbar. Keeper Hope Solo was only able to stop one of Japan's attempts as the favourites were unable to win their third World Cup.
Alex Morgan gave USA the initial lead in the 68th minute, while Aya Miyama scored Japan's first goal of the game in the 80th minute.
The Americans came out of half-time with a new frontline as Morgan replaced Lauren Cheney, who sat on the sidelines for the remainder of the game with ice on an injured right foot. Morgan made in impact moments later as she hit the post, the third time the USA hit the woodwork in the game.
Morgan finally gave the Americans the lead when she flew past Saki Kumagai and hit a perfect shot to the lower right of the net. Midfielder Megan Rapinoe delivered a great cross to the speedy Morgan, who went to the far post for her second goal in as many games.
But following a cross into the box by Sawa, US defenders Rachel Buehler and Alex Krieger missed two opportunities to clear the ball. Miyama, who was parked in front of the net, snuck one past Solo to the left.
Morgan dribbled to the by-line and delivered a perfectly placed cross to Wambach, who headed it into the net for her fourth goal in the last four games as the first extra-time period was coming to a close.
Wambach, who ranks third in the USA national team's all-time record goalscorer list, moved into first place with 13 World Cup goals, including a historic goal in extra time against Brazil in the quarter-finals.
Sawa, however, ended the United States' magical run in Germany. The midfielder scored for the fifth time in six games when she hit a corner off Wambach and into the net, securing a chance to win the game game on penalty kicks.
It was all Japan in the shoot-out. Kaihori saved from the United States' first attempt, which was taken by Shannon Boxx. After Miyama scored on Japan's first shot, USA midfielder Carli Lloyd chipped her shot over the net.
Solo saved the ensuing attempt by Japan's Yuki Nagasato to give the Americans hope, but Tobin Heath missed to leave the U.S. trailing 3-0.
Wombach pulled one back for the Americans, but Mizuho Sakaguchi and Saki Kumagai converted for Japan to put an end to proceedings and kick-start the party for the sentimental favourites of the World Cup as they ran out 3-1 winners in the shoot-out.