The industry ministry said it would provide 802.5 billion yen ($5.4 billion) for the company, a joint venture involving Sony, Toyota, IBM and others.
It brings total government assistance to Rapidus -- which is set to start test production at its factory in Hokkaido in April -- to 1.7 trillion yen, the ministry said.
Global demand for advanced, energy-efficient semiconductors is expected to explode as artificial intelligence technologies play an increasing role in people's daily lives.
Securing stable supplies of chips has become a business and national security concern for Japan, which dominated the hardware industry in the 1980s.
Rapidus aims to mass-produce logic chips using two-nanometre technology, the next frontier in semiconductors containing an even more dizzying number of miniscule transistors.
Japan commanded half the global market for microchips in the 1980s through early the 90s, with the likes of NEC and Toshiba leading the way. But it now accounts for about 10 percent of the market, although it remains a leader in chip-making equipment and materials.
Rapidus chairman Tetsuro Higashi told AFP in an interview last year that the project was the "last opportunity" to put the country's semiconductor sector back on the global map.
"Japan is more than a decade behind others. It will require enormous money just to catch up," he said.
Semiconductors, which power everything from mobile phones to cars, have become a key trade battleground in recent years.
Meanwhile, Taiwanese chip behemoth TSMC is facing pressure to diversify its production as customers and governments worry about the possibility of China invading the island.
TSMC opened a new $8.6 billion factory in southern Japan last year, and is planning a second, $20 billion facility for more advanced chips.
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