The 19-year-old left-hander, ranked 168th in the world, outclassed number 42 Lu 6-2, 6-2 in 101 minutes to emulate countryman Toshiro Sakai's win at the 1974 Games in Tehran.
Nishioka raised his arms in the air after winning on second match-point and then danced on court wrapped around a Japanese flag thrown from the stands by his team.
"This is hard to believe, I have not had a better day in tennis," said the teenager, who is in his first full year on the ATP circuit.
"My aim is to get into the top 100 as soon as possible. I wanted it to happen this year itself. But I am very happy today."
Lu, a 31-year-old veteran who has been part of the circuit since 2000, paid dearly for an error-prone game that produced five double-faults.
"Of course those double-faults cost me, but I tried my best. He was too good for me today," Lu said.
Nishioka ran up a 5-0 lead in the first set before losing his serve to hand Lu his first game. But another break gave the Japanese the first set in just 32 minutes.
Lu never recovered after being broken in the first game of the second set -- mainly due to two double-faults -- and Nishioka clinched victory on his second match point.
Luksika Kumkhum's bid to become Thailand's first woman singles champion ended in despair as Qiang Wang of China won the final 6-3, 7-6 (7/5) in an hour and five minutes.
Luksika, who won the women's doubles gold on Monday with veteran Tamarine Tanasugarn, failed to add another title as Qiang responded cooly to the Thai's attacking ground play.
The 108th-ranked Wang wrapped up the first set in 39 minutes as she broke Luksika twice in succession in the seventh and ninth game to win 6-3.
The gutsy Luksika ran up a 3-1 lead in the second set following a break in the opening game, but failed to hold her serve in the eighth as Qiang made it 4-4.
The Thai, ranked 96th in the world, saved a match point on her serve in the 12th game, forcing the tie-breaker which Qiang won 7/5 on the second match point to take gold.
"I did not serve as well as I should have," Luksika, 21, said. "Losing this one is disappointing, but at least I will return home with a gold and a silver.
Paradorn Srichaphan was the last Thai player to win the singles title at the Busan Asian Games in 2002.
Qiang, who made the second round of the US Open this year, said she was delighted to win her first Asian Games gold medal.
"It is a very good feeling to win this medal," the 22-year-old said. "I am not very experienced, so I hope this title will give my a career a lift."