Japan's parliament passed a $157 billion extra budget on Monday including the issuance of new bonds to pay for the bulk of rebuilding from the March earthquake.

Policymakers hope the spending will also help sustain the economy's recovery as the yen's rise, a global slowdown and contagion from the euro zone debt crisis cloud the outlook.

The 12.1 trillion yen ($157 billion) budget earmarks 9.2 trillion yen for reconstruction spending, including 500 billion yen for subsidies to encourage firms hit by the yen's strength not to move factories and jobs outside Japan.

With public debt twice the size of Japan's $5 trillion economy, the government faces a balancing act to pay for the nation's biggest reconstruction effort since the years following World War Two without choking a fragile economic recovery.

Total spending of 19 trillion yen is planned over the next five years to rebuild northeast coastal areas devastated by the March 11 disaster, including 6 trillion yen already approved by parliament in two earlier extra budgets for the year to March.

From the third extra budget approved on Monday, the government plans to spend 245 billion yen on removing and disposing of soil contaminated by radiation leaks from the Fukushima Daiichi nuclear plant, whose reactors went into meltdown after the magnitude 9.0 quake and subsequent tsunami wrecked their cooling systems.

The extra budget will also enable the government to give a 15 trillion yen boost to its war chest for market intervention to curb the yen, with the borrowing limit to finance such intervention raised by changes in regulations on the state budget.

The bulk of the third extra budget will be funded by reconstruction bonds worth 11.55 trillion yen, to be repaid over 25 years through tax hikes.

The tax plan is stipulated by funding bills that are expected to be passed by parliament early next month. The government aims to raise 10.5 trillion yen mainly by generating 7.5 trillion yen over 25 years from income tax and 2.4 trillion yen over three years from corporate tax.

Analysts expect the spending to push up economic growth by around 1 per cent in the fiscal year from next April, and the government estimates it will boost GDP by around 1.7 per cent with much of the effects trickling down through public spending.