The failed physical means that Okajima's contract with the Yankees, which was agreed upon in December, has been voided. The 36-year-old was ready for his first season in New York after spending his first five seasons in Boston.
Okajima went 1-0 with a 4.32 ERA in seven big league games last season. He did go 8-1 with a 2.29 ERA in 34 games at Triple-A Pawtucket, though, and the Bronx Bombers were hoping he could regain his All-Star form at the major league level.
The Japanese product was named an All-Star in his first season with the Red Sox in 2007, going 3-2 with a 2.22 ERA in 69 innings over 66 games. He has since regressed each season, leading to his demotion last year.
Okajima is 17-8 with a 3.11 ERA in 261 career appearances.