The Asian country have taken the decision due to the rise of coronavirus cases which has thrown Japan into a state of emergency.
Japan recently went ahead with plans to host the Olympic and Paralympic games despite some opposition from its people.
The FIFA Club World Cup is an annual international club football tournament between the winners of the six continental federations and the host nation’s league champions.
A statement on Thursday from the Japanese FA read: 'The FIFA Club World Cup will not be held in Japan in December 2021 as a result of discussions between FIFA and the Japan Football Association (JFA) regarding the status of coronavirus infections and the current conditions for holding it.
'The FIFA Club World Cup was positioned as part of the JFA 100th Anniversary Commemorative Project, but at this point it is difficult to predict the status of the coronavirus infections at the end of the year.
'There are various restrictions such as restrictions on the number of spectators. We have come to the conclusion that it is very difficult to hold the event in the midst of it.'
A FIFA statement added: "FIFA can confirm that it has been informed today by the Japan Football Association (JFA) that, due to the COVID-19 pandemic and hosting situation in the country, they are no longer in a position to host the FIFA Club World Cup 2021.
"FIFA would like to thank the JFA for their work and commitment and looks forward to going back to Japan in the future.
"Further details about an alternative host for the FIFA Club World Cup 2021 will be announced by FIFA in due course."
Chelsea will represent Europe this year after winning the UEFA Champions League while Al Ahly and New Zealand’s Auckland City will represent Africa and Oceania respectively.
Representatives from South America, Asia and CONCACAF are yet to be determined.
