Shigeru Ishiba became Japanese prime minister on Tuesday, seeking to restore the ruling party's popularity and tackle a demographic crisis, and a lacklustre economy.

Ishiba, 67, says he intends to call a general election for October 27. He won a tight race on Friday to lead the Liberal Democratic Party (LDP), which has governed almost constantly for decades.

Japan's parliament, where the LDP has a majority, approved Ishiba's appointment on Tuesday, followed by the announcement of his cabinet, whose 19 ministers included two women.

Former chief cabinet secretary Katsunobu Kato was named finance minister, while Gen Nakatani took defence and Takeshi Iwaya foreign affairs.

Ishiba, who has held at least three previous ministerial posts, is a self-confessed defence "geek" who tried and failed four times before to become LDP leader.

He finally succeeded this time because, while a divisive figure within the party, he is – unlike predecessor Fumio Kishida – relatively popular among voters, analysts said.

Ishiba's win "indicates that the LDP sought an experienced leader with broad voter appeal to steer the party in the next national election," said Yuko Nakano of the Center for Strategic and International Studies.

"If the ruling coalition secures a fresh mandate [in the election], Ishiba will have the opportunity to reshape the party's internal dynamics and restore public confidence, while addressing Japan's broader challenges, including economic stagnation felt by many voters and regional security concerns," she said.

Markets, however, have reacted negatively, with the Nikkei plunging almost five percent on Monday. On Tuesday, the index recovered some ground and closed up 1.9 percent.

Ishiba's backing of interest rate hikes by the Bank of Japan has sent the yen higher, while the prospect of corporate tax hikes has worried investors. (AFP)