It does, and that is the default way that windows scales applications unless they specifically add to their application manifest that they support High DPI.
Using High DPI myself I have never experienced what everyone else seems to be talking about with applications breaking. (Unless you are talking about Windows XP)
I'm running 8.1 on a 13" 1080p laptop (2010 Sony Vaio Z). First party apps seem to be DPI-aware and scale fine. Some third party apps are not DPI-aware and use the new pixel doubling approach. The most surprising offender is Chrome, which is so critical since fonts look grainy and blurry when pixel-doubled. Fortunately each individual app can be overridden: properties on the start menu shortcut / Compatibility / Disable display scaling on high DPI settings. After setting that, Chrome renders at 100% again, so some UI elements are too small--but at least its internal zoom mechanism works correctly for fonts on web pages.
One example app that misbehaves for me on a high-DPI monitor is Camtasia Recorder 7 Specifically, it records an area of the screen that is offset up and to the left of the area indicated by the displayed boundary rectangle. Ableton Live 9 for example has trouble tracking the mouse correctly after clicking and dragging on some controls.
Using High DPI myself I have never experienced what everyone else seems to be talking about with applications breaking. (Unless you are talking about Windows XP)