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Fifty years have passed since the hero of Shin Megami Tensei followed the neutral path, defeated the leaders of Law and Chaos, and founded a state where followers of both ideologies could live freely. But his reign of freedom doesn't last long. The Messian faith gains power, expanding the Cathedral into a new enclosed environment named Tokyo Millennium. The Gaians rise up, but their rebellion is repressed by the Messians' elite warrior class, the Temple Knights. People flock into the encapsulated city, submitting themselves to the strict hierarchy imposed by the Messian Center, where only the privileged living in the Center district are safe from demonic assaults.

A few years later, a retired arena fighter Okamoto rescues a man named Hawk, who was fighting for his life against a demon. He trains him to fight in the arena of the Valhalla district, hoping that he would win the tournament, which will grant them both citizenship in the Center district. When Hawk succeeds, he is brought before a Messian bishop, and learns the shocking truth about his own origins and the role he is supposed to play in the grand scheme of events. A new battle for a better future begins.

Shin Megami Tensei II retains all the gameplay features of the previous game. The player is able to summon demons, fuse them to create more powerful ones, make them participate in battles, talk to random enemies and receive information from them, etc. The combat is turn-based, and the player explores the complex, maze-like dungeons from a first-person perspective view. Like in the first game, the Law, Chaos, and Neutral alignments play an important role: during the course of the game, the player will have to make choices that influence the alignment of the protagonist, steering the storyline into different directions.

New features include a "magic succession" system, which allows demons to carry over their original magic spells when they are fused into new ones, a few additional spells and abilities, and the possibility to play at the casino and win unique items.