The tougher stance taken by U.S. President Donald Trump with North Korea has increased regional tensions, with North Korean leader Kim Jong Un rebuffing admonitions from China and proceeding with missile tests. North Korea launched a failed ballistic missile test on Sunday.

On Monday, Japan's Prime Minister Shinzo Abe urged North Korea to refrain from taking further provocative actions, comply with U.N. resolutions and abandon its nuclear missile development.

"The market has priced in some of the geopolitical concerns, but we are not entirely relieved," said Takuya Takahashi, a strategist at Daiwa Securities.

With Japanese companies reporting their full-year earnings later this month, Takahashi said that investors are increasingly becoming worried about manufacturers' earnings.

Exporters lost ground, with Toyota Motor Corp shedding 1.4 percent, Mazda Motor Corp stumbling 2.0 percent and Panasonic Corp declining 1.0 percent.

While the latest Bank Of Japan tankan survey showed that big manufacturers expect the dollar to average 108.43 yen for this fiscal year, the dollar traded at 108.14 yen on Monday, its lowest since mid-November.

Financial shares also took a hit after the yield on 10-year U.S. Treasury notes fell 14 basis points, for the biggest weekly decline since January 2016.

Mitsubishi UFJ Financial Group shed 1.2 percent, Dai-ichi Life Holdings declined 1.5 percent and T&D Holdings tumbled 1.8 percent.

The broader Topix shed 0.3 percent to 1,455.46 and the JPX-Nikkei Index 400 declined 0.3 perfect to 13,049.04. (Editing by Simon Cameron-Moore)