The British number two succeeded where Laura Robson had failed in Guangzhou last month to become the country's first winner on the women's tour since Sara Gomer in 1988.
The Bollettieri-trained Watson did it the hard way, saving four match points at 5-4 down in the third set.
Watson, ranked 71 in the world, came through a nervy tiebreak 7-4 to finally see off her 134th-ranked opponent in a tense end to the final of the $220,000 hardcourt event.
Before Robson and Watson the last Briton to reach a WTA final was Jo Durie at Newport in 1990 - before either player was born.
"It's just starting to sink in," Watson told reporters after a thrilling final in Osaka.
"I've worked so hard for this moment. That's why I practiced so hard, ran all those miles, lifted all those weights - for moments like this.
"Britain has been breaking quite a few records recently," added Watson, inspired by Andy Murray's U.S. Open victory last month that ended a 76-year wait for a British grand slam men's singles winner.
"I'm happy I could break another one today. I'm proud to do this for my country."
Watson had demonstrated her potential by pushing French Open champion Maria Sharapova to three sets in Tokyo last month, the Russian tipping her to be a future winner.
The 20-year-old from Guernsey, the 2009 US Open girls' champion, had never previously gone beyond the quarter-finals of a WTA event.
Chang, bidding to become the third player from Taiwan to capture a WTA title, had stunned top seed and former U.S. Open champion Sam Stosur in the Osaka semi-finals.
Robson, ranked 56th, failed in her bid to end Britain's barren run when she was beaten 6-3 5-7 6-4 by Taiwan's Hsieh Su-Wei in the final of the Guangzhou Open.
Watson later lost the doubles final with Japan's Kimiko Date-Krumm, foiling her attempt to become the first Briton to win both the singles and doubles at the same WTA event since Anne Hobbs in 1985.
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