Projections indicate that the DPJ will take 44 of the 121seats (half of the upper house) up for re-election. With the 62, it already holds from the other half, it no longer has a majority in the chamber. Its main coalition partner, the People's New Party, did not win any seats.
The poll was seen by many as a referendum on the DPJ administration after it came to power in August 2009, breaking the almost 50-year monopoly of the Liberal Democratic Party (LDP).
Since summer last year, the DPJ lost much of the support it took from the LDP.
However, Prime Minister Kan is not planning to resign. He replaced his DPJ predecessor, Yukio Hatoyama, who was brought down by scandals involving members of his cabinet and the controversy over the US base on Okinawa.
Now he will have to find new allies to govern even if he has a majority in the lower house, the more powerful of the two chambers that constitute Japan’s parliament.
During the election campaign, Kan announced a programme of deep and clearly defined, albeit unpopular economic reforms, including doubling the sales tax to 10 per cent.
Last Friday, he also said that Japan has to take drastic measures to avoid a collapse of its banking system, especially since “Japan's economy is 20 to 30 times bigger than that of Greece and its public debt is huge, so no country in the world could rescue Japan," Mr Kan said.
Today, whilst acknowledging the defeat, he blamed himself for failing to explain his tax hike plan. However, the Nikkei newspaper wrote today many voters agree that a consumption tax is inevitable to fund social assistance. The DPJ election defeat should not lead the government to change strategy on tax policy.
The election has shown how much the country lacks in terms of leadership. Mr Kan himself is the fifth prime minister in four years.
Cabinet secretary Yoshito Sengoku said in a press conference that the prime minister would try to get the support of all other parties.
Experts agree that Japan cannot afford a weak government at a time when important reforms are needed. However, uncertainty remains dominant.
One possibility being explored is the entry of smaller parties into the coalition government. However, Yoshimi Watanabe, leader of the Your Party that had a good result in yesterday’s election, said he would not provide support for the current government.
Another possibility explored by some analysts is the formation of a ‘grand coalition’ between the two largest parties, something possible because many MPs from both sides of the house share the same views on a number of issues.