The fourth seed and US Open champion made it two Grand Slam titles in a row after a see-sawing 2hr 27min match.
The hard-fought victory made Osaka the first Asian, male or female, to hold the world's top ranking, taking over from Romania's Simona Halep.
A rattled Osaka almost blew her title hopes with one hand on the trophy when she failed to convert three championship points when up 5-3 in the second set.
The never-say-die Kvitova won four straight games to force a deciding set before Osaka finally edged ahead with a decisive break early in the third.
The Japanese youngster fell to one knee in celebration, head bowed, after her epic win as Melbourne Park erupted in thunderous cheers.
It was a marked contrast to her maiden Slam win last year, when Osaka cried as boos rang around Flushing Meadows following losing finalist Serena Williams' tirade at the umpire.
This time, Osaka wept tears of joy and smiled as she became the youngest woman to win back-to-back majors since Martina Hingis in 1998 and the youngest number one since Caroline Wozniacki in 2010.
Her performance confirms her status as the leading light of tennis' new generation.
Predictions of a slugfest between two of the game's biggest hitters proved accurate as Kvitova hit 16 winners to Osaka's 14 in the first set.
The pair had never met before and Osaka initially struggled to unlock the lanky left-hander's serve, while Kvitova at times could not handle her opponent's powerful returns.
The Czech mixed up her game with drop shots and changes of pace but blew three break chances in a crunch sixth game.
Serving to stay in the set, Kvitova saved two set points to force a tie-break, which Osaka ran away with 7-2 after finally appearing to get a read on Kvitova's serve.
It was the first set the Czech had conceded in the entire tournament.
Kvitova regrouped and kept her hopes alive with the first break of the match to go up 2-0 in the second after going after Osaka's second serve.
Osaka was frustrated but did not panic, earning three break-back points in the next game, the decisive one off a Kvitova double fault, which she conceded with a poorly hit drop shot to put the set back on level terms.
Osaka, who went into the match with a record of winning 59 straight matches after taking the first set, broke again to take control as Kvitova's error rate climbed.
Osaka then brought up three championship points off Kvitova's serve but the Czech saved all of them, forcing Osaka to serve for the title.
Nerves took hold as Osaka conceded a break to make it 5-5, smashing a ball into the ground and putting her hands over her ears.
She was rattled further after losing a challenge in the next, bringing up break point with a cross-court backhand but was unable to stop Kvitova holding.
The Czech then broke again to seize momentum with her fourth straight game, claiming the set as Osaka left the court with a towel draped over her head.
She regained her cool and came out firing in the third, backing herself and clipping a clean backhand winner after another Kvitova double fault brought up break point in the third game.
She still had to see off a Kvitova break opportunity in the next but held comfortably, her mental demons put to bed.
Kvitova would not surrender, saving three break points before again forcing Osaka to serve it out. Osaka managed it on the second attempt for a famous victory.