The cabinet approved the bill with an amendment requiring the prime minister to inform parliament after the launch of intercept missiles, an official said.
The change was a concession to New Komeito, a Buddhist-linked partner in Koizumi's coalition which wants to keep strict civilian control over the Japanese military, known as the Self-Defense Forces.
The bill was drafted amid worry that Japan, which is officially pacifist, would waste time in administrative procedures before reacting to an attack, as a missile fired from North Korea would reach the country in 10 minutes.
North Korea provoked an international outcry in 1998 by firing a missile over Japan, in what the Stalinist state claimed was a satellite launch.
"The legislation will be sent to the parliament for their deliberation," said a spokesman for the Japan Defense Agency.
"Details regarding the proposed measures will be decided if the parliament passes the bill," he said.
Under the bill, the chief of the Defense Agency would be allowed to order the interception of a missile in an emergency without approval of the cabinet or informing parliament.
But if the situation was not seen as urgent, the defense chief would follow current procedure by seeking approval from the prime minister and cabinet.
Japan is barred from using force or maintaining a military under its constitution imposed by the United States after World War II.
It has gradually sought a greater military role and has sent troops to Iraq on a non-combat humanitarian mission, its first military deployment since 1945.