Acclaimed Russian ballerina Maya Plisetskaya was also one of this year's five laureates, who each receive prize money of 15 million yen ($127,000).
Kusama, 77, is known for her use of polka dots and vivid colors to cover paintings or sculptures, which include flowers and giant pumpkins.
Diagnosed with mental illness, Kusuma's repetitive use of dots and bright colors is said to be a recreation of the visual and auditory hallucinations she suffered as a child.
"Finally time has caught up with me. Many people are now cheering me on and giving me support. I am truly delighted that I have fought with art since I started drawing as a 10-year-old," she said yesterday ahead of the award ceremony, according to the Sankei Shimbun newspaper, which supports the prize.
Kusama, born in the winter resort of Nagano, became a standard-bearer of the European and American art scenes in Japan in the 1960s.
"I want to end my life with a thought of satisfaction. There will be many more mountains and valleys in my life to overcome. I want to walk through those as long as my strength allows me," she said.
Currently, her monochrome paintings are exhibited at an art gallery in New York, while other works, including dot decoration of trees along streets, are displayed in Singapore.
The Praemium Imperiale was established in 1989 by the Japan Art Association, which is governed by the royal family.
This year's award also went to French sculptor Christian Boltanski, German architect Frei Otto, American musician Steve Reich and ballerina Plisetskaya, who remains admired in Japan for her interpretation of "The Dying Swan."
Copyright 2006 Agence France Presse
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