Kan's initial honeymoon period after taking office ended when he said he would like to start a debate on raising the consumption tax in order to fix the nation's financial problems. He suggested an opposition party's proposal to raise the tax to 10 percent might be a starting point for the debate.

Nationally televised election programs announced that exit polls showed the party winning about 43 seats and called the election result a defeat for ruling party.

Half of the upper house seats, or 121 out of the total of 241 seats, were up for grabs in Sunday's national election. Results will not be finalized until Monday.

The Democratic Party of Japan marked a landslide victory in the general election last August, but lost its momentum after the sudden resignation of former Prime Minister Yukio Hatoyama and his successor Kan's hint at a possible hike in the consumption tax, which came soon after his inauguration.

The election was seen as a test for Kan. Since the party is defeated under his leadership, he could step down voluntarily. But he indicated on Sunday he would not.

Kan, who became Japan's leader on June 4, said Sunday his remark on the tax was not adequately explained.

The election dealt a blow to Kan, as opposition parties in the parliament can potentially block any bills except budgets in the absence of a ruling party majority.