France's debt auction later in the day, is also being keenly eyed by markets, traders here said.

The euro's decline negatively affects Japan's key exporters who rely on a weaker yen to boost profits made overseas. When the yen is strong versus its major counterparts, yields are eroded when repatriated on unfavorable exchange rates.

Bank of Japan Governor Masaaki Shirakawa also warned Monday that Japan was not immune from the the crisis in Europe and ongoing risks had to be constantly monitored and addressed.

"Europe's sovereign debt problem remains the biggest risk. This problem may hurt not just Europe's economy but the global economy as a whole through financial market moves," Shirakawa said at speech at a quarterly meeting of the central bank's regional branch managers.

"Japanese financial institutions are not facing any problems in procuring funds but we must continue to carefully watch for risks to Japan's financial system, such as the fallout from Europe's sovereign debt problems," the BOJ chief said.

Following S&P's mass downgrade, Japan's Prime Minister Yoshihiko Noda said that if it could happen to France, then conceivably a downgrade for Japan was far from impossible, unless the nation's fiscal house is put back in order, as Noda has pledged to do, by way of publicly and politically divisive social security and tax reforms.

"The European crisis is not a fire on the other side of the river. Even France's rating has been lowered. If we continue the current fiscal management, Japan will grab the spotlight," the Japanese premier said.