Japan's cabinet has approved the country's biggest ever budget for the financial year from April, in a bid to stimulate the flagging fortunes of Asia's biggest economy.

The budget approved on Wednesday runs to some $980bn and includes increased spending on social security and pensions.

Taro Aso, the Japanese prime minister, has dipped into reserves set aside in a special account to help fund the spending boost which he hopes will fend off some of the worst fallout from the global economic crisis.

Explaining the budget at a news conference in Tokyo, he said the intention was "first and foremost... to protect the living standards of our citizens".

"The world is facing a once-in-a-century recession. And for an extraordinary recession we need extraordinary measures," Aso told reporters.

Japan fell into recession in the third quarter of this year and analysts say they expect worse still to come in the months ahead.

The latest government forecast projects Japan's economy will shrink this fiscal year and manage only flat growth the following year.

Interest rate cut

On Friday, Japan's central bank cut its key interest rate to 0.1 per cent, joining the US Federal Reserve in pushing borrowing costs close to zero.

In a gloomy assessment, the bank said tumbling exports, weakening domestic demand, job losses and the escalating credit crunch would continue to cast a shadow well into 2009.

"Under these circumstances economic conditions have been deteriorating and are likely to increase in severity for the immediate future," it said in its statement.

In an effort to prop-up the economy, Aso has pushed through a raft of fiscal stimulus measures, including a $302.3bn package in October and a $481.5bn plan earlier this month.

Under the new budget approved by the cabinet on Wednesday, general spending will rise to $578.9bn, even though tax revenue is projected to fall 13.9 per cent.

As a result, Japan will see its primary budget deficit jump to more than $145.6bn, up from $56bn this year, most likely derailing government efforts to meet its target of balancing the budget by 2011.

But with his government facing plummeting popularity ratings just three months after he took office, Aso has made it clear that the current financial climate means this is no time for fiscal discipline.