The world's second-largest economy fell into a recession in the third quarter, and the signs since then point toward more misery ahead. The latest outlook by the Cabinet Office projects Japan's economy to shrink this fiscal year and manage only flat growth the following year.
The budget proposal said general spending will rise to 51.7 trillion yen ($578.9 billion) in the year starting April, even though tax revenue is projected to fall 13.9 percent to 46.1 trillion yen ( $516.2 billion).
As a result, Japan will see its primary budget deficit jump to more than 13 trillion yen ($145.6) from 5 trillion yen ($56 billion) this year, and will boost bond issuances by 31.3 percent to cover the revenue shortfall.
The expansion is likely to derail Tokyo's efforts to slim down toward its goal of balancing the budget by 2011. But Prime Minister Taro Aso, facing plummeting popularity ratings, has made it clear that this is no time for fiscal discipline.
On Friday the central bank cut its key interest rate to 0.1 percent, joining the U.S. Federal Reserve in pushing borrowing costs close to zero. And in its gloomiest assessment this year, the Bank of Japan cited the harsh impact of tumbling exports, weakening domestic demand, job losses and growing credit crunch.
"Under these circumstances economic conditions have been deteriorating and are likely to increase in severity for the immediate future," it said in its statement.
The prime minister has responded by introducing a slew of fiscal stimulus measures, including a 27 trillion yen ($302.3 billion) package in October and a 43 trillion yen ($481.5 billion) plan earlier this month.