The budget plan, which will now go before parliament for approval, is 40 billion yen ($441 million) or about 0.8 percent up on the previous year to 4.75 trillion yen ($52 billion), defence ministry officials said.
Excluding some monies related to US bases, it will be the first rise in the pacifist nation's military spending in 11 years, they said.
The ministry will also increase the number of troops by 287. The personnel will be spread throughout the air, ground and maritime self-defence forces, the largest expansion in 20 years, they said.
The extra troops are aimed specifically at "improving readiness of units to ensure intelligence, warning and surveillance and safety in the southwestern region", the ministry said.
The Tokyo-controlled Senkaku islands, which China claims as the Diaoyus, are included in this designation.
In the official brochure detailing the defence programme, the ministry said: "North Korea, which is still developing nuclear and ballistic missiles, continues to be the region's critically destabilising factor."
"We need to give substantial consideration to China's activities recently intensifying in the sea and the air surrounding Japan, including its intrusion into territorial waters and air space," it said.
Beijing has repeatedly sent vessels to the disputed waters, prompting calls in Japan for more measures to defend the islands, which are believed to sit atop sizable mineral reserves.
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