Tokyo's benchmark index fell 0.93 percent Monday on fears over a US budget standoff and worries about the slowing Japanese economy, while a strong yen also weighed on shares.
The Nikkei 225 index at the Tokyo Stock Exchange closed down 81.16 points at 8,676.44, while the broader Topix index of all first-section shares lost 1.12 percent, or 8.16 points, to 722.58.
All eyes are on Washington where a so-called fiscal cliff of deep spending cuts and tax hikes is looming, and could send the world's biggest economy into recession if lawmakers cannot agree on a new deal.
"The stand-off over the fiscal cliff impasse is extending its paralysis to the stock market," said Hiroichi Nishi, general manager of equities at SMBC Nikko Securities.
Adding to the sense of dread for the global outlook, Japan on Monday released data showing its economy contracted 0.9 percent in the July-September quarter, underscoring fears that its post-disaster recovery has stalled.
Investors were also looking ahead to results from Japan's major lenders later this week at the tail-end of the latest earnings season.
"The market is in a lull before the release of major banks' earnings later this week," CLSA equity strategist Nicholas Smith told Dow Jones Newswires.
In Tokyo trade, department store group Isetan Mitsukoshi Holdings was down 3.27 percent at 709 yen after cutting its full-year outlook, while convenience store operator Seven&i Holdings lost 1.56 percent to 2,332 yen.
The yen's strength dragged down exporters, with Toyota down 1.75 percent at 3,085 yen and Sony off 2.61 percent at 856 yen.
Moody's on Friday downgraded Sony's credit rating for the second time in a month as one of Japan's best-known consumer electronics firms struggles to return to profitability.
This summer, Sony shares tumbled below 1,000 yen for the first time since 1980.
Suzuki Motor jumped 4.49 percent to 1,835 yen after posting a sharp rise in first-half profit.
Mazda Motor rose 0.95 percent to 106 yen after news of a tie-up with Toyota to make vehicles in Mexico for the North American market.
In currency trading, the euro bought $1.2710 in Tokyo, from $1.2709 in New York late Friday, while it fetched 100.93 yen from 100.99 yen.
The dollar was down slightly at 79.43 yen.