Since the years following the end of the second world war, the defence agency has had a lower status than other ministries.
Japan renounced war under a US-imposed 1947 constitution and calls its troops self-defence forces.
Its deployment of troops to Iraq was the first since the second world war to a country where fighting is under way.
The bill, one of several government measures aimed at shedding Japan's staunch pacifism, is unlikely to be cleared during the current session of parliament, which ends on June 18. Passage is more likely during an extraordinary parliamentary session scheduled to begin later this year.
The bill also aims to upgrade Japanese troops' peacekeeping and other overseas operations to part of their regular duties in addition to home defence.
Japan still has about 600 soldiers in Iraq providing humanitarian support. Japan also has a contingent of vessels giving logistical support to operations in Afghanistan.
Fukushiro Nukaga, to become the defence minister, said the upgrade would give his organisation greater rights over budget and policy-making decisions.
"We also have to push forward a reform of our mentality so that we can gain public trust," he said.
A Japanese court also on Friday rejected a lawsuit by plaintiffs demanding that their country withdraw the troops on the grounds that the dispatch violated Japan's pacifist constitution.
Court spokesman Takahiro Yamada said the Shizuoka District Court also rejected demands by nearly 250 plaintiffs that the government pay 2.5 million yen ($21,930) in compensation for emotional pain caused by the deployment. Yamada said no other details could be confirmed by the court.
The Kyodo News agency reported the plaintiffs as saying that the dispatch not only violated Japan's pacifist constitution, but had increased Japan's risk of becoming a target for terrorism.
The plaintiffs said the dispatch violated their constitutional right to live in peace, but Judge Akira Miyaoka ruled that concept is "abstract" and does not guarantee a specific right, Kyodo said.
The judge also ruled the government does not have to pay compensation, arguing that opponents to the dispatch should engage in civil activism rather than demanding money from the government, the report said.
Nearly dozen other similar lawsuits are pending across the country.