The 225-issue Nikkei Stock Average lost 58.68 points, or 0.21 percent, from Friday to close the day at 27,842.33.
The broader Topix index, meanwhile, dropped 4.23 points, or 0.22 percent, to close at 1,957.33.
Local brokers said that U.S. producer prices data released last Friday beat median market expectations.
The data, they said, raised the prospect of the Fed forging ahead with its hefty rate hikes to tame inflation amid fears of the world's largest economy slipping into a recession.
Market strategists added that all eyes are now on the outcome of the Fed's policy-setting meeting later this week, and key inflation data ahead of that.
"Japanese investors are worried about prolonged U.S. interest rate increases, and you can see that in the names that are leading declines," Maki Sawada, a strategist at Nomura, was quoted as saying.
"But investors really want to see what the Federal Open Market Committee (FOMC) will do, so I don't expect trading leading up to that to give much indication of market direction," Sawada said.
Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. said if the inflation data does not show the situation in the United States is improving, the likelihood is the market will continue to expect the Fed to push ahead with its aggressive rate hikes.
"If an increase in the CPI does not become as small as expected, it will further fuel the view that the Fed's rate hikes will be prolonged," Fujito was quoted as saying.
Investment analysts said a weaker yen helped trim some losses in later trade, however, as exporters found favor.
A weaker yen versus its major counterparts tends to give exporters a lift, as overseas profits made are increased when repatriated and overall price competitiveness enhanced in global markets, market analysts here said.
By the close of play, iron and steel, nonferrous metals and wholesale trade issues comprised those that declined the most.
High technology issues followed their U.S. peers lower, as the tech-heavy Nasdaq closed lower last Friday, with heavyweights Advantest slipping 0.7 percent, while chip-manufacturing equipment maker Tokyo Electron lost 1.0 percent.
Export-linked issues finding favor on the yen's retreat included Honda Motor edging up 0.1 percent, Nissan advancing 0.6 percent, while Toyota Motor ended 0.5 percent higher.
Issues that fell outpaced those that rose by 973 to 774, while 89 ended the day unchanged.
On the Prime Market on Monday, 921.88 million shares changed hands, dropping from Friday's volume of 1,125.88 million shares.
The turnover on the first trading day of the week came to 2,238.97 billion yen (16.34 billion U.S. dollars).
Latest comments