TOKYO, DEC. 28 -- The Japanese Cabinet today approved a 1988 budget proposal that includes some dramatic spending increases in response to demands from the United States and elsewhere that Japan spur domestic consumption and reduce its huge trade surplus.

The budget for fiscal year 1988, which begins in April, totals nearly 56.7 trillion yen (about $453.6 billion), a 4.8 percent increase over the spending plan released a year ago and the largest increase in six years.

A Finance Ministry official said the new budget, which now goes to the Japanese parliament for consideration, "will adequately respond to the voices from overseas" pressing Japan to increase imports and stimulate its domestic economy.

Reflecting Prime Minister Noboru Takeshita's election promise to bring urban amenities to rural areas, the biggest increase in the budget is a nearly 20 percent jump in money for public works projects.

The budget also continues the controversial increases in defense spending sought by the United States and put in place by former prime minister Yasuhiro Nakasone, who stepped down this fall. Defense expenditures would rise about 5.2 percent, amounting to slightly more than 1 percent of Japan's gross national product.

Until last year, successive Japanese Cabinets had kept defense spending to less than 1 percent of GNP. Last year's decision to breach that barrier raised a storm of protest within Japan and among its Asian neighbors who openly worried about the possible revival of Japanese militarism.

In an effort to demonstrate Japan's willingness to assume international responsibilities commensurate with its wealth, the budget proposes a 6.5 percent rise in aid to developing countries and international organizations, and a 9.8 percent increase in economic development aid.

The budget clearly reflects Japan's strong economy, which the government is predicting will grow about 3.8 percent next year, despite the difficulties the dramatic rise of the yen is causing export-related sectors. Unemployment is projected to drop to 2.7 percent from 2.8 percent this year.

Government figures show that Japan's recent strong economic growth is directly tied to a surge in consumer buying at home rather than more sales overseas, a sharp break from Japan's past export-driven patterns of growth. The Finance Ministry predicted that Japan's trade surplus will drop from $92 billion this year to $81 billion in fiscal 1988. As a result, worries voiced a year ago that the dropping dollar and rising yen would cripple the Japanese economy have receded. Many Japanese business leaders now say the country can manage even if the dollar declines further, which it continued to do today.

After a slow slide this fall, the dollar began plummeting a few weeks ago, and today hit yet another postwar low of 123.55 yen despite massive buying by the Bank of Japan.

The expansionary nature of the fiscal year 1988 budget was made possible in large part by the government's continuing sale of shares in the recently privatized Nippon Telegraph and Telephone Corp., which will bring in an estimated 1.3 trillion yen (more than $10 billion) next year, with 1.2 trillion of that specifically dedicated to public works spending.

At the same time, the budget continues the government's effort to wipe out its deficit and balance its budget by 1990 by sharply curtailing deficit-financing bonds offered next year.

The increase in defense spending in the 1988 budget includes funds specifically earmarked to defray U.S. costs for maintaining its large bases in Okinawa and elsewhere in Japan. Japan's constitution prohibits the use of its military for anything other than defense, so Japan has offered a advanced radar system for Gulf ships and increased funding for the U.S. military presence here as an alternative.

The defense portion of the budget also contains initial funding for procurement of a U.S.-made Aegis radar defense system for use on warships, as well as money for a study of an Iwo Jima installation that would use over-the-horizon radar able to detect aircraft or missiles thousands of miles away.