It currently operates 117 outlets in the country, which are described by industry watchers as typically larger than the average convenience store but smaller than a regular supermarket.
Many foreign retailers have struggled in Japan, hampered by fickle consumer tastes, strong competition and prolonged deflation.
Pharmacy chain Boots has been among other retailers to have left Japan in the past decade.
In a statement, Tesco said it would exit Japan in two stages - first by selling 50% of its shares in Tesco Japan to Aeon.
It then planned to invest about £40m in the Japanese business to finance further restructuring, which would result in it having no further financial exposure to the company.
Tesco's chief executive Philip Clarke said: "I thank our colleagues in Japan, who have done an excellent job for the business - in particular over recent months.
"We are very pleased to announce this deal with Aeon today and are confident that this will deliver the best outcome for our staff, for our customers in Japan and for our shareholders."