Japanese stocks fell sharply in early trading as the Nikkei dropped 2.6% to 63231.25, dragged down by chip and metals shares following overnight declines in U.S. technology stocks. Escalating geopolitical tensions in the Middle East added to the risk-off mood.

Semiconductor equipment maker Advantest plunged 8.0%, while metals producer Mitsui Kinzoku slid 6.1%. The dollar strengthened to 163.80 yen from 163.56 at Monday's close, pressuring export-oriented equities.

Investors are monitoring crude oil prices after Saudi Arabia said it intercepted drones launched by Iran-backed militias in Iraq targeting the kingdom's oil facilities. The incident raises concerns about potential supply disruptions and broader regional conflict.

Market participants remain cautious as they assess the fallout from the Iran-Israel standoff and its implications for global energy markets and risk appetite. Further escalation could deepen the selloff in Japanese equities.