The former Barcelona maestro, who has battled back to action after a serious thigh injury, inked the two-year deal on Tuesday, his 37th birthday.
"What drives me is that I am motivated to work with Vissel Kobe to achieve big goals," he told an online press conference.
"I want to be the one to decide when I will retire. I do not want injuries to force me into retirement."
The World Cup-winning midfielder joined Kobe in 2018 in a deal worth a reported $30 million a year.
He helped Kobe, currently fifth in the 20-team J-League, reach the semi-finals of last year's Asian Champions League.
Iniesta, named Kobe's captain in April 2019, was sidelined for several months after he ruptured a tendon in his right thigh last December.
Following surgery in Barcelona, he was back training in April before returning to action in the J-League this month.