Abe's spokesman Yoshihide Suga said Inada will replace General Nakatani as the Defence Minister, Xinhua news agency reported.
Abe also opted to retain almost half the members of the cabinet. The prime minister shuffled the cabinet for a third time since he took office in 2012.
The reshuffle, following the LDP and its coalition Komeito expanding their power base in an upper house election in July, marks Abe's third since he retook power in 2012.
Eight of Abe's former 19-member lineup were retained in their current roles, including his top spokesperson Chief Cabinet Secretary Yoshihide Suga, Foreign Minister Fumio Kishida and Finance Minister Taro Aso.
The reshuffle was pitched at underscoring Abe's intentions to shore up the country's stagnant economy via the actualisation of the latest instalment of his "Abenomics" blend of economic policies and comes on the heels of the approval of a 28.1 trillion yen ($277.74 billion) stimulus package a day earlier.
However, the appointment of Inada, was made due to Abe's ongoing push to expand the operational scope of the nation's Self-Defence Forces, observers have said.
His choice may stoke controversy both at home and abroad as the minister is an enthusiastic supporter of Tokyo's war-linked Yasukuni Shrine, which she has repeatedly visited.
The shrine, which honours Japan's war dead -- including World War II Class-A war criminals -- is often regarded as a symbol of the country's militarism of the 1930s and 1940s.
Inada is among a number of key nationalistic LDP members that back Abe. The Prime Minister has in the past given her a number of key positions in both the party and the government.
Many regard her Abe's favourite candidate to succeed him as party leader -- and possibly as the Prime Minister.
Abe, who during his first stint as leader from 2007 to 2008 dealt with a number scandals involving cabinet ministers, has prioritised stability in his current term, retaining certain LDP members with proven ability and little potential for scandal.
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