The defense budget, which fell short of initial requests, still had its lowest percentage increase since 1961. But because of Japan's current economic slowdown, it is expected to represent 1.004 percent of 1987 GNP, the nation's output of goods and services.
Another notable budget increase is in foreign aid, which rises by 5.8 percent to $4.1 billion in the fiscal year starting April 1. The $338.1 billion budget now goes to the Diet, or parliament, which is expected to convene Jan. 26.
Chief cabinet Secretary Masaharu Gotoda, announcing the decision, said the government would issue a new guideline next month keeping to the "spirit" of the ceiling and vowed that Japan would not become a major military power.
"What is more important than the limit is what should be accomplished for the nation's defense," said Prime Minister Yasuhiro Nakasone, a conservative who lost a bid last year to have the ceiling formally scrapped. His Liberal Democratic Party has a comfortable majority in the Diet.
Opposition political groups denounced the decision as a betrayal of Japan's postwar peace constitution and threatened a fight when the budget is deliberated.
"It is a reckless act," said Takako Doi, chairwoman of the Japan Socialist Party, the leading opposition group.
The 1 percent limit was designed to show neighboring countries that Japan's defense plans do not include the ability to wage war - still a sensitive issue in the only nation to have suffered a nuclear attack.
But Japan has come under increasing pressure as Washington, facing its own budget restraints and a military buildup by the Soviet Union in Asia, nudged it to share more in the defense of vital Pacific Ocean sea lanes.
Defense, foreign aid and welfare are the only areas increased in the government's national 1987 budget, an austere plan reflecting concern over a mounting national debt and an economic slump brought on by the strong yen. The budget for public-works spending declined.