Ishiba called Sunday's election days after taking office on October 1, but voters angry at a slush fund scandal punished his Liberal Democratic Party (LDP), which has governed Japan almost non-stop since 1955.
Ishiba, 67, insisted on Monday he was staying put, saying he would not allow a "political vacuum" in the world's fourth-biggest economy.
He said the biggest election factor was "people's suspicion, mistrust and anger" after the party scandal, which helped sink his predecessor Fumio Kishida.
"I will enact fundamental reform regarding the issue of money and politics," Ishiba told reporters.
The yen hit a three-month low, sliding more than one percent against the dollar.
According to projections by national broadcaster NHK and other media, the LDP and its junior coalition partner Komeito missed Ishiba's stated goal of winning 233 seats -- a majority in the 456-member lower house.
The LDP won 191 seats, down from 259 at the last election in 2021, and Komeito 24, according to NHK's tallies. Official results were yet to be published.
"As long as our own lives don't improve, I think everyone has given up on the idea that we can expect anything from politicians," restaurant worker Masakazu Ikeuchi, 44, told AFP on Monday in rainy Tokyo.
- Minority government -
On Monday, the LDP's election committee chief, former premier Junichiro Koizumi's son Shinjiro Koizumi, resigned to "take responsibility" for the outcome.
The most likely next step is that Ishiba will now seek to head a minority government, with the divided opposition probably incapable of forming a coalition of their own, analysts said.
Ishiba, who has 30 days to form a government, said Monday he was not considering a broader coalition "at this point".
A minority government will likely slow down the parliamentary process as Japan confronts a host of challenges from a falling population to a tense regional security environment.
It could also push figures within the LDP to try and unseat Ishiba.
"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, a political science professor at the University of Tokyo, told AFP.
"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 said.
- Booted out -
A big winner was former premier Yoshihiko Noda's opposition Constitutional Democratic Party (CDP) which increased its projected seat tally to 148 from 96 at the last election.
Noda in the campaign pounced on media reports that the LDP was financially supporting district offices headed by figures caught up in the slush fund scandal.
"Voters chose which party would be the best fit to push for political reforms," Noda said late Sunday, adding that the "LDP-Komeito administration cannot continue".
Mirroring elections elsewhere, fringe parties did well, with Reiwa Shinsengumi, founded by a former actor, tripling its seats to nine after promising to abolish sales tax and boost pensions.
The anti-immigration and traditionalist Conservative Party of Japan, established in 2023 by nationalist writer Naoki Hyakuta, won its first three seats.
The number of women lawmakers meanwhile reached a record high of 73, according to NHK, but they still make up less than 16 percent of the legislature.
"I think the outcome was a result of people across Japan wanting to change the current situation," said voter Takako Sasaki, 44.
- Asian NATO -
Ishiba said before the election that he was planning a new stimulus packaging to ease the pain of rising prices, another contributor to Kishida's unpopularity.
Another big area of spending is the military, with Kishida having pledged to double defence spending and boost US military ties as a counter to China.
Ishiba has backed the creation of a regional military alliance along the lines of NATO to counter China, although he has cautioned it would "not happen overnight".
China's foreign ministry said Monday it wanted a "constructive and stable China-Japan relationship that meets the requirements of the new era".
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