Japan: Bigger Budget for Bigger Role. RESPONDING TO FOREIGN CRITICS

IN the midst of an economic boom, the Japanese government has proposed a budget for next year which provides the largest increase in spending since 1981. The expansionary budget announced Thursday should encourage economic growth led by demand at home rather than by exports. The government predicts the economy will slow down only slightly in the next year, as Japan continues to outstrip other industrial nations.

Japanese officials are clearly concerned about a rise in trade frictions due to their economy's continued strong showing. Though Japanese consumers and industry are buying more foreign goods, Japanese exports are also starting to pick up after a year of decline. The government still predicts a decline in the huge trade and payments surplus but private economists foresee a slight increase in the trade balance.

The budget responds to calls from foreign critics that Japan use its new wealth to shoulder more of the responsibility for the international economy and the Western security alliance.

Foreign-aid spending, a Finance Ministry official says, will amount to about $6 billion, plus an additional $4 billion in subsidized loans to third-world countries. The Finance Ministry draft budget calls for a 5.9 percent increase in foreign-aid spending. The Cabinet's final version may actually bring a 7 percent hike.

This is likely to make Japan the largest aid donor in the world, ahead of the United States. The level is intended to fulfill a committment made by Prime Minister Noboru Takeshita last year that Japan would double its overseas development aid for 1988-92 from the previous five-year period to a total of $50 billion.

Defense spending will continue its steady increase. The Finance Ministry proposes a 5.2 percent rise, but analysts expect the Cabinet to up that to at least 5.5 percent. The approximately $32 billion defense bill makes Japan one of the largest military spenders, larger than most members of NATO. Still, spending will be equal to about 1 percent of Japan's gross national product.

Overall, the budget accomplishes two standing goals of the ruling conservative Liberal Democratic Party (LDP) and the bureaucracy - to reduce Japan's large budget deficit and to increase the flow of funds for public works and regional development. Those goals have been in conflict, but economic growth has brought unexpectedly large increases in tax revenues. The tax coffers are projected to grow by 13.1 percent next year.

For the past two years, the austerity-minded Finance Ministry has had to back down in the face of demands for more spending. This year the 60.4-trillion-yen (about $491 billion) budget plan calls for 6.6 percent increase in total spending. Subsidies to local governments will grow by almost a quarter. Still, the tax bounty will allow the government to reduce its deficit bonds by a significant amount, toward a goal of ending deficit financing by the following year.

Behind the plan, Japanese analysts see the hand of Mr. Takeshita, who is seeking another term as LDP president - and premier - this fall. Takeshita has pushed through a controversial tax-reform plan which many fear will undermine support for the ruling party. But he is now focusing on a furusato (hometown) project which calls for revitalizing development in local areas, with the aim of reversing the concentration of the Japanese population and economy in the Pacific coast region.

Some critics say this concept is nothing more than an excuse for pork-barrel projects to aid the LDP. The current budget includes, for example, a Takeshita-proposed program to give about $815,000 to each of more than 3,000 local governments, supposedly to finance new development ideas. In reality, says one government official, ``There are no controls on how to spend the money. The idea is: just distribute money to everybody and everybody will be happy.''