The decree goes into effect at midnight in Tokyo, Kanagawa, Chiba and Saitama - home to 36.8 million people in one of the world's busiest metropolitan areas - and will be in effect until February 7.
The nationwide Go To Travel tourism campaign will also be suspended until the same date.
The tougher measure came as Tokyo set a new one-day high of 2,447 fresh cases - a 53 per cent jump from the previous record of 1,591 cases just a day earlier - with the number of serious cases rising to a record 121. Kanagawa, Saitama and Chiba rewrote records with 679, 460 and 450 cases respectively.
"The situation has become increasingly troubling and we share a sense of heightened crisis," Mr Suga told a news conference. "We must stop the infections from spreading, hence this state of emergency, and we want effective and efficient measures in place."
He said that the duration and scope of the state of emergency will be under review, and may yet be again extended or enhanced if more aggressive measures are deemed to be required.
Japan has been struggling to rein in the third wave of Covid-19 infections, with the crisis intensifying nationwide. There were at least 7,490 cases on Thursday - also a new one-day high - as the number of serious patients hit a new record of 796.
Mr Suga was long reluctant to call an emergency over fears of intractable economic problems, with bankruptcies and suicides soaring to new highs last year. The Labour Ministry said on Thursday that more than 80,000 jobs had been lost in the pandemic.
Rather than proactively seizing the initiative, the government stuck to its guns even as early signs of a "third wave" began to be evident in November. It refused to take stronger action until media polls showed the approval rating for Mr Suga's Cabinet nosediving, and the emergency decree followed a request from governors in the Greater Tokyo area for the national government to consider one last Saturday.
The decree has been disparaged as too little, too late, and too half-hearted to rein in the outbreak with the Olympics less than 200 days away. Experts questioned its efficacy, given the limited scope.
Nothing has been shut down, unlike during the first emergency from April 7 to May 25 last year. Rather, the decree takes aim at restaurants and bars by asking them to shut by 8pm - two hours earlier than the previous, largely-ignored, guideline of 10pm - except for delivery and takeout service. Mr Suga cited experts as saying that these are "high-risk areas".
While there are no legal means to impose penalties on non-compliant businesses, Japan will incentivise those who adhere to the curfew with 60,000 yen (S$767) a day and name-and-shame those who do not.
Events can still be held, but must be capped at either 5,000 people or half a venue capacity, whichever is lower.
Elsewhere, entertainment outlets, department stores and sports venues can stay open but are being encouraged to close by 8pm, though without any promised incentives or penalties. Tokyo Disney Resort, Isetan department store and the Ginza Six shopping mall are among those which have said that they will comply.
Schools will stay open, with national university entrance exams to go ahead as planned this month.
Mr Suga said his goal was to reduce movement by 70 per cent by encouraging the wider adoption of telework, and for people to "exercise self-restraint and refrain from going out after 8pm for non-essential outings".
Economy minister Yasutoshi Nishimura, Japan's point man for Covid-19 strategy, said earlier on Thursday that one indicator to lift the state of emergency was a reduction of Tokyo's moving one-week average of cases to below 500 infections. The number stood at 1,230 on Thursday.
To give emergency orders more bite, the government is set to debate new laws to impose punishment on non-compliant businesses. The Mainichi daily on Thursday cited sources as saying that those who flout guidelines may face fines of up to 500,000 yen under the draft law.