Japan’s Prime Minister Shigeru Ishiba has pledged to stay in office despite receiving a major blow in Sunday’s snap election he called himself to shore up more support for his party.

Ishiba told reporters on Monday he would not allow a “political vacuum” to occur after Japan’s ruling coalition lost its parliamentary majority in a significant defeat for his Liberal Democratic Party (LDP), which has governed the country almost continuously since 1955.

Ishiba, 67, called the vote days after assuming office on October 1. But voters, angry at a funding scandal, punished the LDP by reducing it to 191 seats, down from 259 in the 465-member lower house of parliament. LDP’s coalition partner Komeito won 24 seats.

The snap election was the governing coalition’s worst result in 15 years, exit polls and results reported by national broadcaster NHK and other media showed. The yen hit a three-month low as results came out.

Despite this, Ishiba said: “I want to fulfill my duty by protecting people’s lives, protecting Japan.”

“People’s suspicion, mistrust and anger” at the slush fund scandal – which saw LDP figures pocket money from fundraising events and which helped sink his predecessor Fumio Kishida – factored in the election result, Ishiba said.

“I will enact fundamental reform regarding the issue of money and politics,” Ishiba stressed, repeating that voters had delivered a “severe judgement” on the party.

Japanese media had earlier speculated that if LDP lost the majority, Ishiba could quit, becoming the nation’s shortest-serving prime minister since the end of World War II.

The LDP’s election committee chief, former Premier Junichiro Koizumi’s son Shinjiro Koizumi, resigned on Monday.

Ishiba is expected to seek to head a minority government, with the divided opposition seen as likely incapable of forming a coalition of their own, analysts said.

But the prime minister on Monday said he was not considering a broader coalition “at this point”. As mandated by the constitution, the parties now have 30 days to figure out a grouping that can govern.

The opposition, under former premier Yoshihiko Noda’s Constitutional Democratic Party (CDP), made significant gains, which raised its projected seat tally to 148 from 96 at the last election.

“Voters chose which party would be the best fit to push for political reforms,” Noda said late on Sunday, adding that the “LDP-Komeito administration cannot continue”.

Japan’s government and governing coalition officials are planning to convene a special parliament session to select the prime minister on November 11, Kyodo News reported on Monday, quoting multiple unnamed sources.

“Lawmakers aligned with [former Prime Minister Shinzo] Abe were cold-shouldered under Ishiba, so they could potentially pounce on the opportunity to take their revenge,” Yu Uchiyama, political science professor at the University of Tokyo, told the AFP news agency.

“But at the same time, with the number of LDP seats reduced so much, they might take the high road and support Ishiba for now, thinking it’s not the time for infighting,” he added.

Japan’s incoming prime minister Shigeru Ishiba said on Monday he aimed to call snap elections for October 27, as equities plunged on a strong yen and fears that tax hikes are on the cards.

Ishiba, who was set to be formally appointed as premier on Tuesday after winning the leadership of the ruling party, supports the Bank of Japan’s drive to hike interest rates and has said “there is room” to raise corporate levies.

The leadership contest for the Liberal Democratic Party (LDP), which has governed almost uninterrupted for decades, went down to the wire on Friday, with right-winger Sanae Takaichi tipped to win when markets closed.

With Takaichi a fan of former prime minister Shinzo Abe’s unorthodox “Abenomics” economic policies of ultra-low interest rates and tax cuts, the prospect of her winning sent stocks higher and the yen lower.

Takaichi, an arch-nationalist, would also have been the first woman prime minister in a country where men still dominate politics and business.

Ishiba, 67, is a fierce critic of Abe and his last-gasp victory — on his fifth attempt — sent the yen soaring to around 142 per dollar from around 146.50. Investors dumped stocks on Monday, with exporters among the worst hit.

The Nikkei index closed down 4.8 per cent, with Toyota tumbling 7.6pc and real estate company Mitsui Fudosan off 8.7pc.

Ishiba confirmed on Monday media reports that he aimed to call snap elections for October 27, saying it was “important for the new government to be judged by the people as soon as possible”.

LDP elders are banking on Ishiba, a self-confessed defence “geek” fond of making model ships and planes, to boost the party’s popularity.

Its poll ratings fell sharply under outgoing premier Fumio Kishida, hit by a damaging party slush fund scandal and anger over rising prices.

Defence ties

Ishiba vowed on Friday to restore confidence in the LDP after the scandal and to shore up defence ties among neighbours rattled by recent Chinese actions.

He is considering appointing as finance minister Katsunobu Kato, a former chief cabinet secretary who ran in the LDP leadership race, media reports said.

Gen Nakatani, a veteran former defence minister, will return to his old job while Takeshi Iwaya, another former defence minister, will come in as foreign minister, the reports said.

Kishida pledged to double defence spending and deepen military cooperation with the United States and other allies in the region rattled by China’s rise and an unpredictable North Korea.

Ishiba backs the creation of an “Asian Nato” and has said Japan should respond more strongly to Chinese or Russian breaches of its airspace or waters, as has happened repeatedly in recent weeks.

But questions remain over how the government plans to pay for the upgrade and also find enough recruits for the military among Japan’s shrinking population.

Taro Saito, senior economist at NLI Research Institute, told AFP that Ishiba has so far focused on how to improve public finances in Japan, which has one of the world’s highest debt mountains.

“He seems not so interested in policies to boost economic growth, although what is most important for Japan is low growth rather than fiscal health,” Saito said.

Chief cabinet secretary Yoshimasa Hayashi, who is reportedly set to remain under Ishiba, declined to comment on Monday on the fall in stocks but said the government would “make judgements with calm heads”.

“We will continue closely watching trends in financial markets at home and abroad with a sense of vigilance and, while cooperating closely with the Bank of Japan, we will do our best in management of the economy and finance,” he said.