After a record-breaking session on Monday, Japanese shares saw weak trade on Tuesday to close in the red as fresh strikes by the US military in Iran dampened optimism over a possible peace deal.
The Nikkei 225 closed down 162.10 points or 0.3% at 64,996.09.
The US forces attacked missile launch sites and mine-laying vessels in southern Iran, calling them "self-defense" strikes.
In response, a senior spokesperson for Iran's Armed Forces, Abolfazl Shekarchi, said any new aggression against Iran will be met with a "far more severe" response that extends beyond the region, news reports said.
Amid the escalation of the conflict, investor sentiment was also high due to the rebound in global oil prices, as Brent crude rose back to $98 a barrel.
On the domestic front, in a move aimed at easing market anxieties over the nation's finances, the Japanese government will fund its extra budget without increasing bond issuance on a calendar basis, Bloomberg News reported Tuesday, citing Prime Minister Sanae Takaichi.
Another Bloomberg News report on Tuesday quoted finance ministry data to show that Japan slipped behind China to be the world's third-largest creditor nation in 2025, despite posting a record high in its overseas assets.
Also, the Nikkei reported on Tuesday that Japan's small and midsize enterprises are struggling with severe shortages of materials like naphtha due to the prolonged conflict in Iran, revealing a growing strain on their operations.
On the corporate side, Mitsubishi Electric (TYO:6503) and Chiba Institute of Technology have entered into a three-year agreement to collaborate on the development of native physical AI technologies.
Japanese engineering firm Chiyoda's (TYO:6366) was up nearly 4% on Tuesday after it was set to restart work on a liquefied natural gas facility in Qatar, a joint project with France's Technip Energies, Nikkei Asia reported Tuesday.