The legalization of DPP and the introduction of multiparty politics coincided with Chen's release from prison. He joined the DPP and began to serve as legislative assistant to his wife, who had been elected to the Legislative Yuan in 1986. From 1987–1989, he was a member of the DPP Central Standing Committee where he developed a strong network with the party in preparation for seeking a seat in the National Assembly.
In 1989, Chen was elected to the Legislative Yuan and became a major spokesperson for the DPP. As a leader of the party, he championed political democracy and governmental reform. His calls for political and economic reform created enemies in the government, but increased his popularity among the people. From 1990–1994, Chen's political stature increased as he assumed greater political responsibility and prominence. He became the cochairman of the National Defense committee in the Legislative Yuan, a member of the DPP Central Executive Committee, and director of the DPP Caucus in the Legislative Yuan. In recognition of Chen's rising star, Time declared him one of the "Global 100" roster of "Young Leaders for the New Millennium."
Chen was elected mayor of Taipei in 1994. As Taipei's first popularly elected mayor, he obtained a significant electoral following during his administration. Many came to appreciate his proactive administrative style and increased attention to administrative efficiency. Others saw him as an abrasive and confrontational leader who could bring about harmony and consensus. However, supporters point to improved traffic conditions; decreased crime, prostitution and corruption; and the creation of large city parks. He hired additional police officers and used the zoning system to move the vice industry from residential to industrial zones. Periodically, he appealed to younger voters by holding massive downtown dance parties and appeared wearing Superman and other costumes. Despite polls indicating an approval rating of over 70% at the height of his popularity, in 1998, Chen suffered an electoral defeat by losing his reelection bid for mayor to a KMT candidate.
In 1999, Chen was chosen by the DPP as the party's candidate for president. He chose Annette Lu as his vice presidential mate. Like Chen, Lu rose to political prominence from a low-income family. In his policy statement made in Europe, he stated, "Taiwan is a country and I am running for its presidency" provoking the anger of PRC's leaders. Chen and Lu's campaign centered on the themes of Taiwanese independence, an end to KMT dominance, and political and economic reform. As a maverick candidate, he appeared at campaign functions dressed as James Bond and Superman. His campaign web site painted him as an underdog candidate by showing him in a black jumpsuit, suspended above a computer alluding to the theme "Mission Impossible." In the three-way race that divided the establishment vote in two, Chen captured 39% of the vote. The KMT candidate, Lien Chan, garnered 23%, and James Soong, an independent candidate and KMT defector, embarrassed the KMT by obtaining 37% of the votes. The poor performance of the KMT and President Lee's support of Chan led to a crisis within the KMT and his eventual resignation as party leader. The Chen-Lu inauguration marked the first ever peaceful transfer of power from one political party to another, a positive sign of Taiwan's commitment to democracy.