Prime Minister Shinzo Abe announced the decision at a news conference where he said the new measures were intended to add 2 percent to Japan's real economic growth.
Abe urged the central bank to move more aggressively to encourage lending and meet a clear inflation target to break out of the economic doldrums that have plagued Japan for two decades.
Abe took office late last month after a parliamentary election victory by the Liberal Democratic Party, which is touting public works spending and subsidies to strategically important sectors as part of its plan to revive the economy.
"Unfortunately, the previous administration failed to work out how to boost growth and expand the economic pie," Abe said. "It is vital that we have an economic strategy that can create jobs and raise incomes to sustain growth."
Abe, who also served as prime minister in 2006-2007, has vowed to make reviving the economy his top priority, promising support both to small businesses and big industries such as the auto sector.
The spending package includes 10.3 trillion yen ($117 billion) in extra outlays by the central government. Abe's administration is pledging to spend 19 trillion yen ($216 billion) through 2015 in support for reconstruction of the coastal areas devastated by the March 2011 disasters.
The stimulus deal, which will be the basis for a supplementary budget for the remainder of the fiscal year through March 31, required wrangling over tax reform and other issues with the Liberal Democrat's coalition partner, the New Komeito.
It also includes plans a request to raise military spending by 100 billion yen ($1.1 billion) from the 4.6 trillion yen ($52.3 billion) budget last year, the first such increase in a decade.
The increase is partly aimed at beefing up monitoring and defenses around islands in the East China Sea, known as the Senkakus in Japan and the Diaoyu islands in China. A territorial dispute over the uninhabited islands flared into anti-Japanese riots across China last autumn after Japan's central government purchased them from a private owner.
Asked how he could maintain his own staunch stance on the territorial issue while protecting Japan's substantial business interests in China, Abe blamed China for any deterioration in business ties.
"It was wrong for China as a country responsible to the international community to allow damages to Japanese-affiliated companies and Japanese nationals that have made contributions to the Chinese economy to achieve a political goal," Abe told a press conference.
Earlier this week, Defense Minister Itsunori Onodera acknowledged the size of the budget request increase and added that the rise would be aimed at stepping up defense against threats from Japan's "neighboring countries."
On the economic front, Abe has urged Japan's central bank to do whatever it takes to meet an inflation target of 2 percent to counter a persisting cycle of sinking prices and weak demand.
The change of administration has raised hopes that Abe's more aggressive approach might help Japan escape recession.
Japan's benchmark Nikkei 225 stock index jumped 1.4 percent Friday morning following Abe's announcement. The Japanese yen, whose strength has hamstrung many exporters, weakened against the U.S. dollar, meanwhile, to 89.06 yen per dollar.