The spending boost is part of a 96.72 trillion yen overall budget that also sets a record high.
The defence boost comes after a year of increasingly assertive maritime activity by China in disputed seas.
The plan also approves the purchase of a range of US defence hardware, deepening co-operation with America.
Among the defence equipment Japan will be buying from the US, is a surveillance drone, F-35 fighter jets, an Aegis destroyer, submarine construction and spending on sonar development.
The Japanese parliament must approve the budget, but as Prime Minister Shinzo Abe's Liberal Democratic Party controls both houses of parliament, it is expected to pass.
The military spending boost is the fourth successive increase and represents a 1.5% boost on this year's total.
It follows a controversial legal change that broadened the definition of self defence, to allow Japan to come to the aid of allies abroad, despite a constitutional bar on offensive military action.
The draft budget also features record-high social security spending - the biggest single item - to help deal with Japan's ageing population, and stimulate the economy.
Japan's cabinet has approved a record 5.1 trillion yen ($42.1bn; Â£28.4bn) military budget for the next financial year, its fourth annual increase.