The Nikkei share average dropped 2.17% to close at 29,839.71, marking its biggest fall since June 21. The broader Topix slipped 1.7% to 2,064.55.
Growing fears of a possible default by Evergrande rattled global markets on Monday, with the S&P 500 and Nasdaq suffering their biggest daily percentage drop since May.
However, market participants said the impact of the sell-off on the Japanese market was limited.
“Domestic investors who had sold their stocks at a height of a recent rally bought back shares on dips today, which supported declines driven by foreigners’ sell-off,” Seiichi Suzuki, chief equity market analyst at Tokai Tokyo Research Institute.
Heavyweight SoftBank Group dragged the Nikkei the most, falling 4.98%, followed by supplier of chip equipment Tokyo Electron dropping 2.45% and air-conditioning maker Daikin Industries falling 4.71%.
Shares sensitive to the global economy also declined, with steel makers losing 3.64% and machinery makers falling 3.37%. Shippers dropped 3.2%.
But, travel-related shares rose on hopes of an economic reopening as Tokyo witnessed a drop in COVID-19 infections.
Airliners ANA Holdings rose 2.53% and Japan Airlines jumped 4.47%. Central Japan Railway, which runs bullet trains between Tokyo and Osaka, advanced 3.15%.
There were 14 advancers on the Nikkei index against 210 decliners.
