Mr Hatoyama is likely to be confirmed as prime minister in two weeks' time
Japan's next leader, Yukio Hatoyama, is beginning a transition to power after winning a landmark general election.
Exit polls show his Democratic Party of Japan overwhelmingly defeated the Liberal Democratic Party, which has governed almost unbroken since 1955.
PM Taro Aso has conceded defeat and said he would resign as LDP head.
Media forecasts give the DPJ 308 of the 480 seats in the lower house to the LDP's 119, almost an exact reversal of their previous standing.
Japan's Nikkei stock market index jumped to an 11-month high in early trading as the scale of the DPJ's victory became clear, but the rise of the yen and Chinese stock falls led to an overall fall of 0.3%.
Official results are still to be released.
Roland Buerk, BBC News, Tokyo
The vote was as much an expression of disgust with the Liberal Democratic Party as an endorsement of the Democratic Party of Japan.
But the people have handed Mr Hatoyama a thumping majority and the legislative clout to push change through parliament.
His challenge now is not to disappoint.
Mr Hatoyama, the wealthy heir to an industrial and political dynasty, is expected to announce a transition team later in the day.
He is expected to be confirmed as prime minister when parliament meets in about two weeks.
His Cabinet is expected to be in place by then, and his party is also in coalition talks with two smaller opposition parties whose support it needs in the upper house.
"It's taken a long time, but we have at last reached the starting line," Mr Hatoyama told a news conference at his home in Tokyo on Monday.
"This is by no means the destination. At long last we are able to move politics, to create a new kind of politics that will fulfil the expectations of the people."
Mr Aso said he would step down as LDP leader - his successor is expected to be named in September.
"I have no plan to run for re-election," he said, quoted by the Associated Press. "The most important thing is rejuvenating our party."
Kotaro Tamura, another LDP lawmaker, said: "We made too many mistakes. Very crucial mistakes... we changed prime minister three times without holding an election."
Correspondents say attention will now to turn to whether Mr Hatoyama can deliver on his election promises.
He must steer the world's second biggest economy back to sustainable growth after a crushing recession, and tackle record unemployment.
Mr Hatoyama has also promised to expand the welfare state, even though Japan is already deeply in debt and the rapidly ageing population is straining social security budgets.
On foreign affairs, the DPJ says it plans to create a new diplomacy less subservient to the US and to improve relations with Japan's Asian neighbours.
The White House has already said it hopes to forge strong ties with the incoming government.
"We are confident that the strong US-Japan alliance and the close partnership between our two countries will continue to flourish under the leadership of the next government," White House spokesman Robert Gibbs said.
Kyodo News agency put turn-out at 69%, up from 67.5% in 2005.
Officials said people turned out despite a combination of typhoon-triggered rainfall around Tokyo and a government warning that a swine flu epidemic was under way.
JAPANESE MEDIA REACTION TO THE ELECTION
Even while the public harboured apprehensions about the DPJ, it was the sense of urgency that there was no way out of the current deadlock without a political breakthrough that generated this tremendous seismic change. Many challenges await the new government to be headed by DPJ leader Yukio Hatoyama. It must bring about change without growing complacent in numbers, and with the spirit and readiness to revamp Japanese politics.
The Mainichi Daily News on
the challenge facing Mr Hatoyama and the DPJ
His political credo of "yuai" (fraternalism) comes from his grandfather. But it is an unfamiliar term to most people, and his behaviour has been considered bizarre at times. But his steadiness during the three years he served as secretary general under Ichiro Ozawa helped him return to the DPJ's helm as a self-avowed "mature Hatoyama", humbled, chastened and cured of his past indecisiveness.
The Japan Times
describes Mr Hatoyama as "more capable"
The party's immediate task will be to find ways to recover from this historic defeat. However, it will not be easy for the LDP to rally from the catastrophic blow of this election, in which many party heavyweights lost their seats.
The Daily Yomiuri on
the task facing the LDP