Sources said that Japan Leasing Corporation filed for bankruptcy totalling 2.2 trillion yen ($16.1bn).
At the same time, Prime Minister Keizo Obuchi agreed with opposition parties legislation on how to use public money for failed financial institutions.
The sources said Japan Leasing Corporation's filing was the biggest bankruptcy ever, overtaking Yamaichi Securities' 2 trillion yen financial collapse last November.
Japan Leasing Corporation had major loans outstanding on agricultural- type leases, one of the country's most vulnerable sectors. The leases covered aircraft, ships, farm equipment and land.
It was the largest of three non-bank affiliates of troubled Long-Term Credit Bank of Japan (LTCB), whose future had held up agreement between Mr Obuchi's government and opposition parties about legislation to get Japan out of its economic quagmire. The opposition had opposed using taxpayers' money to get all failed financial institutions out of their debt.
In another possible move to get Japan's battered economy back on track, a local news agency reported the Japanese government was considering lending some of its government-held US Treasury bonds to Japanese banks as an emergency measure to help them raise dollars.
Kyodo News Service said that under the plan Japanese banks would borrow US Treasury bonds held by the Japanese government - at low interest rates and without collateral - to get dollar loans from foreign banks. A Japanese government spokesman had no comment on the report.
Kyodo said the measure was a way to deal with "financial instability" that has led foreign banks to charge a "Japan premium" - the extra interest Japanese banks have to pay on funds raised overseas - or made foreign banks reluctant to give dollar loans to Japanese banks.
The measures added up to steps to get money back into Japan's banking system at a time when a government minister forecast the nation's economy would shrink again in the July to September quarter.Reuse content