The construction of the Ariake Arena was part of the original plans for the Games but taken under review as the price tag for many venues soared after Tokyo won the race to host the Games in 2013.
Tokyo 2020 organisers have vowed to keep costs below $20 billion but the International Olympic Committee feels even that amount is too high.
City governor Yuriko Koike said on Friday the proposal to use Yokohama Arena had been scrapped and plans to build the Ariake Arena would be submitted to the four-party working group, which includes the IOC, for approval on Wednesday.
Koike also unveiled a plan to sell off the operating rights of the arena to a private company after the Games, Kyodo news agency reported.
After taking office earlier this year, Koike ordered a review of the Games budget that recommended revised plans for three venues to trim costs projected to hit 3 trillion yen ($25.42 billion), four times the initial estimates.
Koike's plans to use existing facilities for the three venues have now been abandoned, although cost-cutting measures, such as cutting the number of seats at the swimming venue, have been imposed.
Organisers have blamed the soaring budget on increased construction costs after the earthquake and tsunami five years ago.
($1 = 118.0100 yen)
(Writing by Nick Mulvenney in Sydney, editing by Sudipto Ganguly)
