The eldest son of a priest in the Pure Land sect of Buddhism, Niwa grew up at Sogenji, a temple in Yokkaichi near Nagoya. After his graduation from Waseda University, he reluctantly entered the hereditary priesthood at Sogenji but quit two years later, at the age of 29, in order to become a writer, walking out of the temple grounds on 10 April 1932 and heading back to Tokyo. He was supported by his girlfriend until his marriage in 1935. During this time he published Sweetfish (Japanese Ayu), serialised in Bungei Shinju, and the novel Superfluous Flesh (Japanese Zeiniku).

Niwa's work was controversial and during World War II a couple of his novels were banned for immorality; he worked as a war correspondent in China and New Guinea; he accompanied Rear Admiral Gunichi Mikawa's Eighth Fleet and was on board the flagship Ch?kai during the Battle of Savo Island on 9 August 1942. He was wounded at Tulagi. These experiences inspired Naval Engagement (Japanese Kaisen) and Lost Company (Kaeranu Chutai), both censored.

After the war Niwa became the extremely prolific author of more than 80 novels, 100 volumes of short stories, and 10 volumes of essays. His most celebrated short story was The Hateful Age (Japanese Iyagarase no Nenrei, 1947), about a family terrorised by a senile grandmother, which became so famous that the phrase "the hateful age" entered the language for a time.

The novel The Buddha Tree uses his unhappy childhood at Sogenji as a backdrop. When he was eight years old his mother eloped with an actor from the Kansai Kabuki company, an event that greatly traumatised him; in this novel the story is elaborated fictionally.

Later works include, from 1969, a five-volume biography of Shinran (1173-1262), the founder of the Pure Land sect, and in 1983 an eight-volume work on Rennyo, a 15th Century monk who died on a pilgrimage to India.

In 1965 Niwa was elected a member of the Art Academy of Japan, and the following year he was elected as the chief director of the Japanese Writers' Association, a position he held for many years. Niwa encouraged fellow members to play golf, organised health insurance, and bought land for a writers' graveyard. He was awarded the Order of Culture in 1977.

He was diagnosed with Alzheimer's disease in 1986. He was married twice and had one son and one daughter, Keiko Honda, who described his decline in Days of Care (Japanese Kaigo no hibi, 1997). He died of pneumonia in 2005.