TOKYO (Reuters) - Japan's cabinet approved on Friday an economic stimulus package in the biggest spending boost since the financial crisis as Prime Minister Shinzo Abe pursues an ambitious agenda to spur growth and end nagging deflation.

The government will spend 10.3 trillion yen ($116.8 billion) on public works, incentives for corporate investment and financial aid for small firms to help the economy emerge from a mild recession triggered by falling exports last year.

The stimulus package is part of a 13.1 trillion yen extra budget for the current fiscal year to March due to be approved by the cabinet next week. Abe is gambling that a shift to a more expansionary fiscal policy and more monetary easing from the central bank can end years of stop-start growth.

"We'll build a framework for strengthening cooperation between the government and the Bank of Japan. We strongly expect the BOJ to conduct aggressive monetary easing with a clear price target," the government said in a statement.

"In addition, we will continue to keep close watch on currency markets and respond as appropriate."

The government expects the stimulus to raise real economic growth by 2 percentage points and create 600,000 jobs.

The strategy is not without its risks as Japan's debt burden is already the worst among major economies and government bond yields have been on the rise as investors fret about excess bond sales to fund fiscal spending.

The government will sell around 5 trillion yen more bonds than originally planned for the current fiscal year to fund the stimulus, a government official said.

The stimulus package is a combination of construction projects, such as repairing ageing roads and school buildings, subsidies to encourage companies to develop new technologies and loan guarantees for small firms.

The government will front load some spending on reconstruction from a record earthquake and nuclear disaster almost two years ago and for strengthening defences against natural disasters.

The government will establish several funds involving the private sector and state-backed lenders, including one to encourage private-sector lending to Japanese firms looking to acquire companies overseas and one to lend to companies establishing new product or business lines.

The extra budget expected next week will allocate 2.8 trillion yen to help make up for a shortfall in reserves for the pensions system.

Abe has made reviving the economy his top priority after his Liberal Democratic Party (LDP) won elections last month, returning the party to power after three years in opposition.

Abe's spending promises have raised concerns that Japan's public debt burden, already the worst among major economies at more than twice the size of its $5 trillion economy, could deteriorate further.

The LDP returns to government after more than half a century of nearly non-stop rule. During this time, excessive public works spending was the hallmark of LDP economic policy, which helped contribute to the country's large debt burden.

($1 = 88.2000 Japanese yen)

($1 = 88.2000 Japanese yen)

(Reporting by Stanley White and Tetsushi Kajimoto, Editing by Mayumi Negishi)

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