His departure will deprive Taro Aso, prime minister, of a heavyweight political ally and key cabinet member just as he struggles to respond to a recession of historic proportions and win back the confidence of voters.
Mr Aso initially backed his finance minister, who has denied being drunk at a press conference at the G7 gathering in Rome during which he slurred his words and struggled to stay awake and focused.
Mr Nakagawa, who has blamed his poor showing on taking too much cold medicine, initially tried to delay the effective date of his resignation until the Diet passes stimulus legislation and the state budget, but under growing political pressure was forced to step down immediately.
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