The head coach has included four Scotland international in his starting XV, and another on the bench.
Ali Price the Glasgow scrum-half, is named among the substitutes.
Sutherland’s selection is a major boost after the injury issues which threatened his participation with the Lions. The loosehead prop dislocated his shoulder playing in Scotland’s Six Nations win over France in Paris at the end of March and has not played since.
Van der Merwe will play for the Lions just eight months after making his Scotland debut. The winger has made an instant impact in Test rugby, scoring eight tries in ten matches.
Watson and Fagerson have been key men for Scotland this season, playing in the wins in Paris and at Twickenham, and now have an early opportunity to stake claims for places in the Lions Test team in South Africa.
The experienced Conor Murray will start at scrum-half at Murrayfield but Price is likely to see some game-time in the second half.
Eight Scots in total are in the Lions squad. Of the other three, Stuart Hogg is still with Exeter as they prepare for the English Premiership final against Harlequins this weekend; Finn Russell has just joined up with the squad from Racing 92 and Chris Harris suffered a hand injury recently while playing for Gloucester.
Saturday’s game is the first-ever fixture between the Lions and Japan and will be played at a quarter-full BT Murrayfield, with 16,500 supporters attending.
The match, which will be shown live on Channel 4, is a curtain-raiser for the Lions’ tour of South Africa where they will play eight games including three Test matches against the world champions Springboks.
"We’re anticipating a tough game against Japan – a side that like to play at a high-tempo and shift the ball," said Gatland.
"We saw throughout the World Cup they have attacking threats across the park and a solid defence and set piece.
"I’m pleased with the progress we’ve made during our training camp in Jersey so far, but we’ve a long way to go. You can see that the squad are starting to get to grips with our game strategies, but, as always with a Lions Tour, this takes time to bed in.
"We’re in a good place though and I can tell there’s a lot more to come from this group.
"Everyone in the squad will get a start before the start of the Test Series, so each member of the squad can put their hand up for Test selection.
"We are absolutely delighted to be playing in front of sixteen thousand supporters in Edinburgh. I’m sure the crowd will give the players an enormous lift before we depart for South Africa on Sunday."
British & Irish Lions team (v Japan, BT Murrayfield, Saturday, 3pm)
15. Liam Williams (Scarlets, Wales)
14. Josh Adams (Cardiff Rugby, Wales)
13. Robbie Henshaw (Leinster Rugby, Ireland)
12. Bundee Aki (Connacht Rugby, Ireland)
11. Duhan van der Merwe (Edinburgh Rugby, Scotland)
10. Dan Biggar (Northampton Saints, Wales)
9. Conor Murray (Munster Rugby, Ireland)
1. Rory Sutherland (Edinburgh Rugby, Scotland)
2. Ken Owens (Scarlets, Wales)
3. Zander Fagerson (Glasgow Warriors, Scotland)
4. Iain Henderson (Ulster Rugby, Ireland)
5. Alun Wyn Jones – Captain (Ospreys, Wales)
6.Tadhg Beirne (Munster Rugby, Ireland)
7. Hamish Watson (Edinburgh Rugby, Scotland)
8. Jack Conan (Leinster Rugby, Ireland)
16. Jamie George (Saracens, England)
17. Wyn Jones (Scarlets, Wales)
18. Tadhg Furlong (Leinster Rugby, Ireland)
19. Courtney Lawes (Northampton Saints, England)
20. Taulupe Faletau (Bath Rugby, Wales)
21. Ali Price (Glasgow Warriors, Scotland)
22. Owen Farrell (Saracens, England)
23. Anthony Watson (Bath Rugby, England)