A former special forces chief, Pandjaitan, 67, was already one of the country's most powerful men thanks to his role as chief of staff in the president's office, a job he will keep.
As coordinating minister, Pandjaitan will have six ministers reporting to him, including those with the foreign, home affairs and defence portfolios.
The wily and avuncular ex-general already leads an inner circle of advisers, who together have brought policymaking more squarely under the presidential palace than at any time since the fall of authoritarian leader Suharto in 1998.
With economic growth at its slowest pace for six years, Widodo may feel he needs extra levels of control.
The president has gone into damage control mode in recent months, bypassing economy ministers and personally intervening to soothe and charm investors. Pandjaitan was brought in by Widodo as part of that drive.
The country's first president from outside the political and military elite, Widodo is perceived by some to be out of his depth and unable to navigate vested interests in Jakarta.
Insiders say that his unprecedented consolidation of power within the palace shows a determination to assert himself.
But Pandjaitan's emerging role as gatekeeper to the president is not without risks, causing confusion among investors who are key to reviving Indonesia's stalling economy, and alienating the political parties that support him.
"WHO'S CALLING SHOTS?"
For some in the business community, the enhanced powers of the presidential office add to a sense of muddled policymaking that has been a hallmark of Widodo's first year in office.
"We're not sure who's calling the shots on policymaking - is it the presidential office or the ministries?" said one member of the foreign investment community, who asked not to be named due to the sensitivity of the issue.
There is also the possibility that leaders of political parties in Widodo's ruling coalition could feel shut out.
Atmadji Sumarkidjo, a deputy to Pandjaitan, said his boss's role was clear "and there shouldn't be any confusion about it".
"He doesn't interfere in any ministry," Sumarkidjo told Reuters. "He only steps in when there is confusion about policy or overlapping regulations.
"When it comes to investors, he is there to facilitate the government and the relationship with businesses. When it comes to politics, it's a natural part of the role of chief of staff to talk to political parties."
Pandjaitan was not available to comment for this article.
The expansion of Pandjaitan's authority has been seen as a sign Widodo is digging in his heels against vested interests.
Earlier this year Widodo shored up military support by allowing to it to nudge into civilian life, countering the influence of the national police and bringing him into conflict with his main political patron, Megawati Sukarnoputri.
To many, Pandjaitan is something of a chameleon.
Under Suharto, he headed the military's special forces and in retirement remains influential in military affairs.
But after the fall of the Suharto regime he transitioned into civilian life, serving in successive governments and overseeing a sprawling commodities group.
An early investor in Widodo's furniture business, Pandjaitan was quick to distance himself from his party, Golkar, when it threw its weight behind Widodo's election rival.
He became a key financier of Widodo's presidential campaign and was rewarded with a newly created position in government.
According to members of Pandjaitan's team, their eloquent English-speaking boss holds regular meetings with investors.
As chief of staff he is also tasked with talking to the opposition coalition that controls parliament, to make sure Widodo's programmes can be passed without a hitch.
But with such wide-reaching influence, Pandjaitan is already ruffling feathers. The vice-president and leaders in Widodo's own party, the PDI-P, bristle at being sidelined.
"From what we've seen, the presidential office is just more bureaucracy and we haven't seen any results," said senior PDI-P politician Andreas Paraeira.
"In fact it can make things like communicating with the palace difficult, especially if it's run by a political figure like Luhut. Why do we need him?"
There was some surprise that, in the reshuffle, Widodo resisted demands from his party for more political appointments, and instead brought in technocrats as well as strengthening Pandjaitan's authority.
Observers said Pandjaitan provided political cover for Widodo, who rose from small-town mayor to president of the world's third-largest democracy in just two years, and is still considered a novice on the national scene.
"Keeping Luhut around has probably helped Jokowi manage a tough political situation where there are a lot of interested parties around him, pressuring him," said Jakarta-based political analyst Douglas Ramage. (Additional reporting by Jakarta bureau; Editing by Mike Collett-White and John Chalmers)