The result does not directly affect the DPJ's grip on power, because of its majority in the more powerful lower house.
But it does mean that the party will need to seek new partners to control the upper chamber, which can block legislation, as they struggle to push through economic reforms and rein in Japan's huge public debt.
The results also leave Kan vulnerable to an internal challenge at a party leadership vote in September, though he said on Monday he wanted to stay in his job.
"I want to accept the election results sincerely and continue responsible policies with the feeling that this is a new start line," he said.
Failure to explain
Kan said that he felt responsible for failing to fully explain his proposal for a raise in sales tax to help pay off the debt, but said he would continue to call for multi-party talks on the topic.
Kan, who took office just a month ago, is already the country's fifth prime minister in three years.
The DPJ won power in a historic landslide just last year, ousting the long-dominant conservative LDP with promises to cut waste and focus spending on consumers.
|Divya Gopalan reports from Tokyo on public reaction to the electoral setback for the DPJ
But public backing nosedived due to indecisive leadership and broken election promises over the relocation of a US airbase.
Support for the DPJ briefly rebounded when Kan took office in early June, but tumbled quickly again after he floated the idea of raising the sales tax from five to ten per cent.
Analysts have said that while many voters accept the need for an eventual sales tax rise, given a public debt already about twice the size of Japan's $5 trillion economy, the DPJ failed to convince voters they had a coherent plan to cure the country's economic ills.
Kan said his ruling party will ask opposition parties to co-operate on a policy-by-policy basis rather than invite them into a formal coalition.
The loss of its narrow upper house majority means that Kan will have a tougher time passing the fiscal reforms he says are needed.
Nabe Watanabe, a political analyst and senior fellow at the Tokyo Foundation, a policy think-tank, said the ruling party had failed to deliver reform as promised.
"The people's expectation of DPJ was reform and unfortunately the DPJ failed to show their message clearly," he told Al Jazeera.
"Also, the people are somehow frustrated with the raising of consumption taxes without streamlining government.
"I think the way the prime minister can survive is very limited but he could.
"DPJ has a majority in the lower house, so if it finds a good partner on issue by issue - for example, the raising of consumption taxes, reduction of government deficit or [limiting the] influence of bureaucrats - that agenda could be shared by a newly emerging small but strong party."