The ministry decided yesterday that Hanwa Bank, a regional bank with 190bn (pounds 1bn) in mostly property-linked bad loans, is insolvent and must be wound up immediately.
Hanwa is the15th Japanese bank to collapse in the last two years, and the first to be closed without the deposits being transferred to a new bank. Analysts praised the action and predicted more shutdowns.
"This is a very good sign, and it indicates the authorities are determined to get Japan's financial system back into good health as soon as possible," said Brian Waterhouse, an equity analyst at HSBC James Capel.
Mr Waterhouse said the ministry was "paying particular interest" to the bad loans of four or five more of Japan's 150 commercial banks.
The ministry sounded its own warning to insolvent banks. "The Finance Ministry will not delay confronting the problems of failed financial institutions," Finance Minister Hiroshi Mitsuzuka said yesterday.
"A fast response will contribute to the recovery of Japan's financial system."
Banking analysts say this represents a change of heart for a ministry that has long failed to force weak financial institutions to shut.
The delays have added to the amount of bad loans, now estimated at 35,000bn by the ministry. Urban land prices have plunged more than 55 per cent since 1991, cutting deeply into the value of collateral.
The Ministry of Finance denies, however, that there will be more failures of Japanese regional banks if current economic conditions prevail.
Auditors for Hanwa Bank had instructed it to write off massive problem loans in the first half of the year. This led to the bank having an excess of liabilities over assets.