The mechanism for sex determination in mammalian germ cells remains unclear. Here, we reconstitute the female sex determination in mouse germ cells in vitro under a defined condition without the use of gonadal somatic cells. We show that retinoic acid (RA) and its key effector, STRA8, are not sufficient to induce the female germ‐cell fate. In contrast, bone morphogenetic protein (BMP) and RA synergistically induce primordial germ cells (PGCs)/PGC‐like cells (PGCLCs) derived from embryonic stem cells (ESCs) into fetal primary oocytes. The induction is characterized by entry into the meiotic prophase, occurs synchronously and recapitulates cytological and transcriptome progression in vivo faithfully. Importantly, the female germ‐cell induction necessitates a proper cellular competence—most typically, DNA demethylation of relevant genes—which is observed in appropriately propagated PGCs/PGCLCs, but not in PGCs/PGCLCs immediately after induction. This provides an explanation for the differential function of BMP signaling between PGC specification and female germ‐cell induction. Our findings represent a framework for a comprehensive delineation of the sex‐determination pathway in mammalian germ cells, including humans.