The Industry Ministry said the investment, which will see the building of a new plant in western Java, would create 20,000 new jobs across the industry and would improve the investment climate in Indonesia.
"This is a positive investment. It shows that foreigners are comfortable investing in Indonesia," the ministry's head of automotives Budi Darmadi told AFP.
Japanese car giant Toyota plans to increase production from 110,000 now to 180,000 by 2013.
"But if demand is higher than that, they may produce more, so they could potentially increase production by 70 percent," Darmadi said.
As Toyota struggles with a downturn in demand at home and key export markets such as the United States and Europe, Indonesia continues to be a sweet spot for the company.
Toyota is expected to sell around 300,000 vehicles in the country this year giving it about 40 percent of the rapidly growing market.
"This market is helping cheer us up," company President Akio Toyoda was quoted by Dow Jones Newswires as saying.
"Globally, the news is so dark so we're thankful the market here is bright and vibrant."
Copyright AFP (Agence France-Presse), 2011