Hatoyama, the outgoing prime minister, quit earlier this weekamid plummeting popularity ratings after he failed to deliver on a campaign promise to relocate a controversial US military base off the island of Okinawa.
"Our first priority is to regain the trust of the people"
He had been in office for barely eight months.
Hatoyama's cabinet resigned en masse early on Friday morning, clearing the way for the ruling party to vote in a new leader.
As prime minister, Kan will face daunting choicesin how to lead the world's number two economy, burdened with massive public debt, sluggish growth and an aging, shrinking population.
He will also have to hit the ground running to rally voter support and revive his party's battered image ahead of next month's elections for the upper house of parliament.
The July poll is being seen as a referendum on the DPJ's performance since its landslide win in last August's lower house election which unseated the long-ruling conservative Liberal Democratic Party.
|Hatoyama's about-turn over a US military base sparked an angry backlash [AFP]
In a speech to DPJ members before Friday's vote Kan urged the party to deal with "money politics" and come clean with voters.
"I will do my utmost, taking up the baton from Prime Minister Hatoyama," he said.
"Our first priority is to regain the trust of the people."
Kan has highlighted economic recovery and growth as the biggest challenges in the months ahead.
Seijiro Takeshita, the director of Mizuho International financial group, told Al Jazeera Kan is "a much better choice than Hatoyama at least he is not a muppet of Ichiro Ozawa".
"He is one of the very few politicians able to increase consumption taxation, by doing so he would utilise that extra revenue in order to create new jobs - the biggest frustration which Kan is going to target the most within the next 12 months," he said.
Japan is the slowest growing economy in Asia, and is expected to be overtaken in size by China sometime this year.
While Japanese exports and factory output have shown some signs of recovery following the global financial crisis, unemployment and deflation are worsening.
"I will tackle and pull Japan out of deflation through comprehensive measures from the government and the Bank of Japan," Kan said in a statement, hinting that he would seek greater co-operation from the central bank.
On foreign policy – a sensitive issue in the wake of the wrangling over the Okinawa base – Kan described Japan's relationship with the US as the "cornerstone" of Japanese diplomacy.
But he also stressed the importance of Japan's ties with regional neighbours.
"With the US-Japan alliance the cornerstone of our diplomacy, we must also work for the prosperity of the Asian region," he said.