Morales was detained at Fukuoka airport after a customs officer found the euphoria-inducing drug MDMA, better know as ecstasy.
"He was arrested for allegedly violating the law on narcotics and psychotropics control," a police spokesman told AFP.
Authorities allegedly found five granules of MDMA -- weighing 0.3 grammes -- in Morales' carry-on suitcase, according to the Asahi Shimbun newspaper.
The Sankei Shimbun newspaper reported that the 56-year-old DJ denied the allegation, saying: "It's not mine. (Someone) might have tried to frame me".
Morales was scheduled to perform at events in Fukuoka on Saturday and Tokyo on Sunday, according to his website.
Morales was an influential figure in the New York dance scene during the 1980s and 1990s. He has remixed and produced releases for artists including Mariah Carey, Aretha Franklin, Michael Jackson and Janet Jackson, according to his website.
Morales was nominated for his first Grammy Award in 1996 as a producer for Mariah Carey's song "Fantasy." Two years later, he won the Grammy for "Remixer of the Year."
Japan has strict anti-drug laws where even possession of minute quantities can lead to jail sentences. Possession of ecstasy for personal use, however small the quantity, carries a maximum jail sentence of seven years and a three million yen fine ($26,000) fine.
In arguably Japan's most infamous music drug bust, Paul McCartney spent nine days in a Tokyo jail in 1980 after being caught at the airport with a bag of marijuana in his suitcase.
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