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In his inaugural speech on Thursday, he called for dialogue to establish stability with the mainland.
But Mr Chen also defended his controversial plan for constitutional changes, and urged Beijing to respect Taiwan's desire for democracy.
China regards the proposals as a moves towards independence and has threatened to counter them with force.
The inauguration went ahead despite a legal challenge against Mr Chen's re-election in March.
The president won the vote by less than 0.2% of the vote and Taiwan's highest court is yet to rule on a recount demanded by the opposition.
Speaking in heavy rain behind a bullet-proof glass, Mr Chen said he would try to "reconcile the deep divide" caused by the election and "unify the people of Taiwan".
He also defended his plan for change, saying Taiwan's current constitution was outdated.
He called constitutional reforms his "historic responsibility", saying they were necessary to make the government more efficient so that democracy could progress.
But President Chen made clear the new constitution would not address the issue of sovereignty.
Beijing has warned that it will crush any moves towards Taiwanese independence, even at the cost of its own economic prosperity and good relations with the US.
In his speech, Mr Chen said military threats by China only serve to alienate the people of Taiwan.
"Facing the other side's military build-up, we have to reinforce our national defences," he added.
The US has condemned China's warnings, saying such language has "no place in international civilised discourse".
The White House reiterated America's commitment to the Taiwan Relations' Act, aimed at ensuring that the island can defend itself.
However Washington has also warned Mr Chen against changing the status quo.
Prime Minister Yu Shyi-kun has been reappointed. He and his cabinet were also sworn in on Thursday.
The ceremony was boycotted by the opposition, which held a rally in Taipei to protest against the official election results. Taiwanese President Chen Shui-bian says a top priority for his second term will be improving ties with China.
In his inaugural speech on Thursday, he called for dialogue to establish stability with the mainland.
But Mr Chen also defended his controversial plan for constitutional changes, and urged Beijing to respect Taiwan's desire for democracy.
China regards the proposals as a moves towards independence and has threatened to counter them with force.
The inauguration went ahead despite a legal challenge against Mr Chen's re-election in March.
The president won the vote by less than 0.2% of the vote and Taiwan's highest court is yet to rule on a recount demanded by the opposition.
Speaking in heavy rain behind a bullet-proof glass, Mr Chen said he would try to "reconcile the deep divide" caused by the election and "unify the people of Taiwan".
He also defended his plan for change, saying Taiwan's current constitution was outdated.
He called constitutional reforms his "historic responsibility", saying they were necessary to make the government more efficient so that democracy could progress.
But President Chen made clear the new constitution would not address the issue of sovereignty.
Beijing has warned that it will crush any moves towards Taiwanese independence, even at the cost of its own economic prosperity and good relations with the US.
In his speech, Mr Chen said military threats by China only serve to alienate the people of Taiwan.
"Facing the other side's military build-up, we have to reinforce our national defences," he added.
The US has condemned China's warnings, saying such language has "no place in international civilised discourse".
The White House reiterated America's commitment to the Taiwan Relations' Act, aimed at ensuring that the island can defend itself.
However Washington has also warned Mr Chen against changing the status quo.
Prime Minister Yu Shyi-kun has been reappointed. He and his cabinet were also sworn in on Thursday.
The ceremony was boycotted by the opposition, which held a rally in Taipei to protest against the official election results.
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