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"The China-Japan relations issue will put negative pressure on market sentiment," said Kazuhiro Takahashi, a general manager at Tokyo-based Daiwa Securities Capital Markets Co. "If the FOMC surprises the market by more monetary easing, we may see a weak- dollar, strong-yen situation again."
Komatsu, which receives nearly 26 percent of its revenue from China, fell 1 percent to 1,923 yen and Industrial farm equipment maker Kubota Corp. fell 1.2 percent to 763 yen.
Hitachi Construction Machinery Co., which counts China as its biggest market, slid 0.9 percent to 1,853 yen and Nippon Yusen K.K. , a shipping line that receives 25 percent of its sales from Asia, lost 0.9 percent to 346 yen.
"If the situation gets worse, there's a possibility Japan would try to implement sanctions on China, which would be negative for related companies in Japan," said Daiwa Securities' Takahashi.
Exporters slid in later trade with Honda Motor Co. shedding 0.5 percent to 3,000 yen and Toyota Motor also edging down 0.5 percent to 3,070 yen.
Nissan Motor slipped or 0.7 percent to 713 yen, a day after company President Carlos Ghosn said the automaker will double its annual production capacity in China by 2012.
Bucking the downward exporter trend however, Canon Inc., the world's largest camera maker, advanced 1.4 percent to 3,905 yen.
The company will boost profit by 50 percent in the three months ending September from the same period a year earlier on strong Asian sales of digital single-lens reflex cameras, the Nikkei newspaper reported.
Consumer lenders rallied Tuesday, with Acom Co. leading lenders higher on speculation they will benefit from a decline in refund claims for overcharged interest.
Consumer lenders are receiving fewer claims, leading to a buying spree for their stocks, said Natsumu Tsujino, an analyst at JPMorgan Chase & Co.
Acom soared 17 percent to 1,548 yen and Promise Co. surged 8.6 percent to 718 yen. Takefuji Corp. meanwhile jumped 8.1 percent to 187 yen and Aiful Corp. rose 3.5 percent to 119 yen.
In thin trade some 1.53 billion shares changed hands on the Tokyo Exchange's First Section, down from Friday's volume of 1.67 billion shares, with declining issues outnumbering advancing ones by 893 to 596.