The Hual Europe, which has been stranded off Izu Oshima since running aground two months ago, caught fire on Monday. The cause of the fire is not known.
Dozens of residents from the small island, about 100 kilometres south of Tokyo, have been evacuated amid fears that the cargo may explode.
Dense smoke has been rising from the ship, which is now tilting at a 60 degree angle towards the shore.
Firefighters helpless
"We cannot fight the fire because the water is too shallow for firefighting vessels but too far from shore for land based firefighting units," said a Japanese coast guard, quoted by AFP.
Around 50 volunteer firefighters are standing by to fight the blaze.
A helicopter and three patrol ships are monitoring fuel oil which is leaking from the ship.
The ship was carrying 3,689 vehicles and 1,300,000 litres (338,000 gallons) of fuel oil when it set off for Jamaica.
About 40,000 litres (8,800 gallons) of fuel are still thought to be on board.
Thirty-one residents have been evacuated as officials fear that the remaining cargo could explode.
Oil has been washing onto the shore in Izu Oshima since the Hual Europe ran aground, stopping fisherman from catching lobsters and other sea life.
~RS~a~RS~International~RS~q~RS~~RS~z~RS~09~RS~)