While the ballot does not directly determine whether Ishiba's administration will fall, it heaps political pressure on the embattled leader who also lost control of the more powerful lower house in October.
Ishiba's Liberal Democratic Party (LDP) and coalition partner Komeito were certain to fall short of the 50 seats needed to secure the 248-seat upper chamber in an election where half the seats were up for grabs, NHK said early on Monday, with six seats still to call.
That comes on top of its worst showing in 15 years in October's lower house election, a vote which has left Ishiba's administration vulnerable to no-confidence motions and calls from within his own party for leadership change.
Speaking late on Sunday evening after exit polls closed, Ishiba told NHK he "solemnly" accepted the "harsh result".
"We are engaged in extremely critical tariff negotiations with the United States ... we must never ruin these negotiations. It is only natural to devote our complete dedication and energy to realizing our national interests," he later told TV Tokyo.
Asked whether he intended to stay on as prime minister and party leader, he said "that's right".
Japan, the world's fourth largest economy, faces a deadline of August 1 to strike a trade deal with the United States or face punishing tariffs in its largest export market.
The main opposition Constitutional Democratic Party was set to finish second, vote counts showed.
The populist nationalist Sanseito party, birthed on YouTube a few years ago, announced its arrival in mainstream politics with its "Japanese First" campaign and warnings about a "silent invasion" of foreigners winning broader support.
It was set to add at least 13 seats to one elected previously.
Opposition parties advocating for tax cuts and welfare spending have struck a chord with voters, the exit polls suggested, as rising consumer prices - particularly a jump in the cost of rice - have sowed frustration at the government's response.
"The LDP was largely playing defence in this election, being on the wrong side of a key voter issue," said David Boling, a director at consulting firm Eurasia Group.
"Polls show that most households want a cut to the consumption tax to address inflation, something that the LDP opposes. Opposition parties seized on it and hammered that message home."
The LDP has been urging for fiscal restraint, with one eye on a very jittery government bond market, as investors worry about Japan's ability to refinance the world's largest debt pile.
Any concessions the LDP must now strike with opposition parties to pass policy will only further elevate those nerves, analysts say.
"The ruling party will have to compromise in order to gain the co-operation of the opposition, and the budget will continue to expand," said Yu Uchiyama, a politics professor at the University of Tokyo.
"Overseas investors' evaluation of the Japan economy will also be quite harsh."
Sanseito, which first emerged during the COVID-19 pandemic questioning vaccinations and decrying global elites, is among those advocating fiscal expansion.
But it is its tough talk on immigration that has grabbed attention, dragging once-fringe political rhetoric into the mainstream.
Japan, the world's oldest society, registered a record-high number of foreign-born residents last year of about 3.8 million.
That is still just 3 per cent of the total population, a much smaller fraction than in the United States and many European countries, but comes amid a tourism boom that has made foreigners far more visible across the country.
