The Finance Ministry's draft budget suggested a spending increase of 6.6 percent to 88.5 trillion yen (S$1.44 trillion) for the next fiscal year - the biggest ever figure in an initial proposal.

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 in the year starting April, even though tax revenue is projected to fall 13.9 per cent to 46.1 trillion yen.

As a result, Japan will see its primary budget deficit jump to more than 13 trillion yen from 5 trillion yen this year, and will boost bond issuances by 31.3 per cent to cover the revenue shortfall.

The draft budget is scheduled for Cabinet approval on Wednesday and will likely be submitted to parliament in January.

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 per cent, joining the US 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 package in October and a 43 trillion yen plan earlier this month.

The Cabinet on Saturday approved a 4.79 trillion yen supplementary budget for this fiscal year through March to fund some of the stimulus steps. Among Mr Aso's measures are expanded credits for small businesses, lower highway tolls and a cash payout to every household to spur spending.

Still, it may not be enough to trigger a turnaround for Aso and his Liberal Democratic Party, which looks increasingly likely to lose its decades-long grip on political power.

The embattled Mr Aso has repeatedly come under fire for verbal gaffes and a lack of leadership through the global economic crisis.

His approval rating has plunged to about 20 per cent in the three months since taking office. -- AP