Although the more powerful lower house is expected to reverse the move, it heightens the political deadlock over Japan's global military role.
Last month, the opposition succeeded in calling a halt to Japan's naval support for the US-led mission in Afghanistan.
Meanwhile, a former defence official has been arrested over bribery claims.
Takemasa Moriya, who served as vice defence minister for four years, is accused of giving preferential deals to the Yamada Corporation in return for gifts.
He has admitted to playing golf more than 200 times with a Yamada representative, but has repeatedly denied favouring the firm.
Analysts say the arrest is adding to the already-tense situation that is paralysing policy-making in the country.
The scandal is threatening to engulf other senior officials, with Finance Minister Fukushiro Nukaga being summoned to testify before the upper house next week.
Mr Nukaga served as defence minister between 2005 and 2006, when Mr Moriya was his second-in-command.
Prime Minister Yasuo Fukuda told parliament on Wednesday that the defence ministry needed "comprehensive reform".
"A problem has occurred that damages people's confidence, and that is extremely regrettable," he said of the bribery allegations.
The Democratic Party of Japan (DPJ), the main opposition party, opposes the country's involvement in operations in both Afghanistan and Iraq.
Japan provided non-combat troops for humanitarian operations in southern Iraq from 2004 to 2006.
But DPJ deputy Yukihisa Fujita said that "in seeking to fight terrorists, Japan's overseas military activities are instead creating conditions that invite their attack".
Japan has pledged to continue its air support mission in Iraq until July 2008, and will take a role in reconstruction efforts for a year beyond that.