Japan started working with the US on developing a system after North Korea shocked Tokyo by test-firing a long-range missile over the country in 1998.
'Co-operation with US'
The annual paper said North Korea was "improving its capability of managing ballistic missiles" and "trying to further extend their firing range".
North Korea's ballistic missiles "are now regarded as more practical", the report said.
"It is necessary to finish deploying a ballistic missile defence as quickly as possible," said the report, adding that there was a need for Tokyo to strengthen co-operation with the US military.
Earlier this week, Pyongyang conducted a series of missile launches that heightened tension in the region. It fired its first nuclear test last October.
Japan has budgeted $1.3bn (161 billion yen) to develop and deploy its missile defence system up to March 2008, up 4.4 per cent from the previous year.
Mamoru Kotaki, the ministry's press secretary, said the missile system will take priority in the reduced defence budget.
The US last year installed Japan's first anti-missile system on the southern island of Okinawa.
The defence report also said that Japan has made "international peacekeeping" a primary mission for its military.
"There is no intention of departing from conventional defence policies or for Japan to become a military power"
Mamoru Kotaki, defence ministry press secretary
The move underscores a continuing transformation of Japan's post-World War II military.
The report said Japan will continue to increase its participation in such missions in a "proactive'' manner".
Shinzo Abe, the Japanese prime minister, citing the threat of a nuclear-armed North Korea and the expansion and modernisation of China's military, has sought to champion a constitutional overhaul that would allow for a much freer hand in security policy.
Japan's annual defence expenditure is roughly $42 bn, the overall figure hovering around one per cent of its GDP, compared to the US' three per cent.
Kotaki, the ministry spokesman, said Tokyo was not seeking fundamental changes in its basic defense policies.
He added: "There is no intention of departing from conventional defence policies or for Japan to become a military power."