Tokyo shares fell in morning trade Monday, sliding 0.63 percent on concerns over stalled talks on raising the US debt ceiling that also spurred the safe-haven yen.
Worries over a possible default by the world's top economy sent investors to buy the yen and sell the dollar, a trend that hurts Japanese exporters by eroding overseas earnings.
The Nikkei index at the Tokyo Stock Exchange lost 63.48 points to 10,068.63. The Topix index of all first section shares fell 0.59 percent or 5.12 points to 863.69.
As Asian financial markets opened for the new trading week, it was still uncertain whether the White House and US lawmakers would reach a deal by a deadline of August 2 to avoid a disastrous sovereign debt default.
Investors who had previously written off the impasse as political gamesmanship were now being forced to consider the possibility of default, dealers said.
"If a deal cannot be reached by the end of this week, it will cause a major problem so markets will be jittery ahead of the deadline," Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management, told Dow Jones Newswires.
Finance Minister Yoshihiko Noda said he would "monitor" the US negotiations, in a brief remark to reporters shortly before the opening bell.
He said he would also watch the forex market, with the sustained strength of the yen hurting Japan's export sector.
"I will continue to closely monitor market movement today," Noda said, as the yen climbed to 78.39 to the dollar, firming further from 78.52 yen in New York Friday.
Against the euro, the Japanese unit was at 112.87, down from 112.69 in New York.
The yen's strength was "throwing cold water" on manufacturers that have recovered quickly from disruptions caused by the March earthquake and tsunami, said Tetsuya Miura, chief market analyst at Mizuho Securities.
However, investors remained hopeful for solid corporate earnings from major Japanese firms. A slew of Japanese corporate earnings are due this week, including results from Nissan Motor, Sony, and Fanuc.
Toyota Motor lost 1.34 percent to 3,290 yen in the morning session. Construction equipment producer Komatsu fell 2.24 percent to 2,482.
Sony fell 1.85 percent to 2,061.
Utility stocks were lower, with Tokyo Electric Power, the operator of Japan's crippled Fukushima Daiichi nuclear plant, off 6.3 percent at 509 yen.