But trade was cautious ahead of restructuring plans that General Motors Corp and Chrysler LLC are required to submit by Tuesday showing how they can be made viable after receiving $13.4 billion (Dh49 billion) in emergency aid.
"Investors are selling stocks not only in Japan but in other Asian markets as they wait for restructuring plans from GM and Chrysler. There's a view in the market that they might not be able to submit it on time," said Soichiro Monji, chief strategist at Daiwa SB Investments.
"Although there's no specific news prompting a sell-off, shares of companies with credit worries are under pressure, such as real estate and financial firms."
Japanese Finance Minister Shoichi Nakagawa said on Tuesday that he would resign after passing the budget for next fiscal year, following criticism of his behaviour at a weekend G7 news conference in Rome, though the news may be neutral for stocks.
"The resignation of Nakagawa wouldn't have an impact on the stock market, but if anything, it's positive that he'll do this after the budget is passed," Monji said.
The benchmark Nikkei shed 108.47 points to 7,641.70, after earlier touching its lowest point since November 21.
The broader Topix lost 1.7 per cent to 756.84.
Bank shares slid in the wake of falls by their global peers after Friday's profit warning by Lloyds, which revived concerns it could need more state funds or be fully nationalised due to deepening problems at its subsidiary HBOS, which it bought last month.
Mitsubishi UFJ Financial Group, Japan's top lender, lost 4.3 per cent to ¥450, while No 2 bank Mizuho Financial Group slid 3.9 per cent to ¥200. Sumitomo Mitsui Financial Group skidded 3.6 per cent to ¥3,240.
Property firms slid after data released on Monday showed the number of new apartment units put up for sale in metropolitan Tokyo for January fell 24.1 per cent from the same month last year.
Mitsui Fudosan, Japan's largest real estate developer, tumbled 6.8 per cent to 1,086 yen while Sumitomo Realty & Development fell 5.7 per cent to 992 yen and Mitsubishi Estate declined 5.8 per cent to ¥1,080.
The real estate subindex shed 5.4 per cent, making it the biggest loser among the subindexes.
Even after the dollar rose to its highest in more than a month against the yen, some high-tech shares, which climbed last week, lost ground.
Advantest Corp fell 3.6 per cent to ¥1,302 and Tokyo Electron slid 3.7 per cent to ¥3,350.
Among stocks that gained, Bridgestone Corp, Japan's biggest tyre maker, jumped 4.1 per cent to ¥1,335 after Credit Suisse upgraded it to "outperform" from "neutral" and raised its target price to ¥1,700 from ¥1,400, citing its resilience amid negative conditions.
The stock was the biggest positive contributor to the Nikkei 225.