Koizumi's re-election as the leader of the Liberal Democratic Party (LDP) means he would lead his ruling coalition into a general election as early as November.
It also paves the way for a cabinet shake-up that possibly will be aimed at pushing forward the prime minister's reformist agenda.
Koizumi, 61, defeated three challengers, all of whom had criticised his tight fiscal stance and urged the government to spend more to stimulate Japan's long stagnant economy.
Koizumi won 399 of the 657 votes up for grabs. His closest challenger, former LDP policy chief Shizuka Kamei, secured only 139 votes.
His landslide victory has surprised many, since political analysts were predicting a close race even a few weeks ago.
The large margin of victory could strengthen the prime minister's hand against those who want him to tone down his agenda for change.
Having retained the leadership, Koizumi is expected to undertake a cabinet reshuffle next week. There is also talk that he could call for snap elections in November.
Though elections are not due until mid-2004, Koizumi is thought to be keen on snap polls to encash on his popularity and the early signs of an economic recovery.