Tokyo stocks closed down 2.06 percent on Monday as the dollar dropped sharply against the yen on concerns about a budgetary stand-off in Washington that threatens to shut down parts of the government.
The benchmark Nikkei 225 index slipped 304.27 points to 14,455.80, while the Topix index of all first-section shares declined 1.92 percent, or 23.42 points, to 1,194.10.
With lawmakers on Capitol Hill unable to reach agreement on a new budget, thousands of federal workers are expected to be told to stay at home from Tuesday.
Traders fear an extended impasse as Republicans say they will only agree to a deal that includes cuts to President Barack Obama's health law overhaul.
Adding to the crisis is the a looming row over the US debt ceiling, which must be raised before mid-October, when the government runs out of money to pay its bills.
Economists expect talks on that to also go to the wire, rekindling memories of a face-off in 2011 that resulted in the loss of Washington's triple-A credit rating and heavy losses on global stock markets.
"Things are far from the 'panic stage', but they don't have to be for investors to be spooked by the apparent intractability of the US political deadlock," said Tachibana Securities market analyst Kenichi Hirano.
In forex trading, the dollar fell to 97.84 yen from 98.24 yen in New York Friday.
"The currency market reflects the lack of faith in US politicians to get anything constructive done," a Japanese market analyst told Dow Jones Newswires.
A stronger yen is a negative for shares of Japanese exporters as it shrinks the value of their repatriated foreign income.
Automakers fell with Toyota down 2.63 percent at 6,270 yen and Honda losing 2.73 percent to 3,735 yen.
Toshiba finished lower, slipping 1.12 percent to 440 yen after announcing it would shut or sell two of its three wholly owned overseas television plants in the next six months, shedding 2,000 jobs.
Major lenders were also down, with Mizuho Financial Group easing 4.05 percent to 213 yen.
The decline comes after Japan's financial watchdog on Friday ordered Mizuho, Japan's third-biggest bank, to stop lending money to gangsters, saying it has made little progress in tackling the problem.
The lender had processed hundreds of transactions worth about $2.0 million for "anti-social forces", a common term for Japan's yakuza mobsters.