Kan resigned as president of the ruling Democratic Party of Japan, which in effect meant leaving the office of prime minister.
Kan, who had been under intense pressure since the nuclear crisis triggered by a March 11 earthquake and tsunami, had said earlier he would leave with Parliament's passage of two major bills dealing with a government bond issue and renewable energy. The bills were approved Friday.
The Democratic Party of Japan planned to elect a new party president Monday with campaigning set to start Saturday, Kyodo News reported.
The party president normally becomes the prime minister.
Among lawmakers expected to seek the top party position are former Foreign Minister Seiji Maehara and Finance Minister Yoshihiko Noda, Kyodo said.
Britain's Daily Telegraph reported Kan's popularity had been declining, hitting a low of 15 percent in latest polls.
Kan's successor will become Japan's sixth prime minister in five years.
"The latest power change will yet again give the world the impression that Japan's leadership is fickle," said Shinichi Nishikawa, professor of politics at Meiji University in Tokyo, the Telegraph reported.
The March disaster caused economic damage that has run into the hundreds of billions of dollars.
Moody's rating agency this week lowered Japan's debt rating a notch to Aa3 from Aa2, saying the downgrade was "prompted by large budget deficits and the buildup in Japanese government debt since the 2009 global recession." The agency said the outlook, however, looks stable.
Japan's total debt is about 200 percent of its GDP.
"The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi Nuclear Power Station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions," Moody's said.