The video, 67 seconds long, was released Saturday as others before it, by ISIS media wing Al Furqan Media, and cannot be authenticated by CNN.
"We are deeply saddened by this despicable and horrendous act of terrorism and we denounce it in the strongest terms," Japanese Prime Minister Shinzo Abe said in Tokyo, according to broadcaster NHK. "To the terrorists, we will never, never forgive them for this act."
He said that Japan will continue to provide humanitarian aid to countries affected by the bloody fight against ISIS.
Goto's mother, Junko Ishido, said he wanted to help create a world without wars.
"I'm shedding tears of sorrow, I just can't think of any words to say. But I don't want this sorrow to create a chain of hatred," she said, NHK reported.
The video opens with a black slate that reads, "A Message to Japan." The video then shows a kneeling Goto wearing an orange outfit. The man known as "Jihadi John" is standing behind him.
The terrorist speaks while holding a knife in his left hand.
"Abe, because of your reckless decision to take part in an unwinnable war, this knife will not only slaughter Kenji, but will also carry on and cause carnage wherever your people are found. So let the nightmare for Japan begin," the man says.
The video cuts to black as the militant puts the knife to Goto's throat. It then shows the apparent result of the decapitation. It's not clear who conducted the apparent killing.
The knife-wielding masked man with a London accent, nicknamed "Jihadi John," has issued threats and overseen the beheadings of other captives. He has appeared in at least six videos with hostages.
The fate of a Jordanian pilot captured by ISIS in Syria, Moath al-Kasasbeh, was unclear. He is not mentioned in the video.
ISIS had been demanding that Jordan exchange a convicted terrorist, Sajida al-Rishawi, for the pilot. If there was no swap, ISIS said it would kill al-Kaseasbeh first, then Goto.
Goto would be the second Japanese hostage to be killed by ISIS recently. A video file posted online a week ago by a known ISIS supporter shows an image of Goto holding a photo of what appeared to be the corpse of his fellow captive, Haruna Yukawa.
U.S. President Barack Obama called the act a "heinous murder."
"We stand today in solidarity with Prime Minister Abe and the Japanese people in denouncing this barbaric act," the President said in a written statement. "We applaud Japan's steadfast commitment to advancing peace and prosperity in the Middle East and globally, including its generous assistance for innocent people affected by the conflicts in the region."
The 47-year-old Goto left Japan last fall, when his youngest daughter was 3 weeks old. His wife, Rinko, first heard from his captors December 2.
Jordanian officials have said they are willing to swap al-Rishawi -- a female jihadist imprisoned in Jordan for her role in a 2005 suicide bombing at a wedding reception that killed dozens -- for the pilot. But Jordan's key condition is proof that al-Kaseasbeh is still alive.
Al-Kaseasbeh was captured after he ejected from his F-16 jet last month near Raqqa, the extremist group's de facto capital in Syria.
Fahed al-Kaseasbeh, an uncle of the pilot, told CNN: "I am sad and devastated to hear this news, regardless of the nationality of the person. I am sad about this act of the beheading of any human. Also, I am very worried about the well-being of the son of my brother, my nephew."