Shenmue is a hybrid game that incorporates elements of life simulation, adventure, and fighting with light role-playing. The game is set in a 3D environment that can be freely explored by the player. Much of the gameplay involves talking to Ryu's friends and the various people around town, hoping to find hints or clues that lead to the next step in the story. Any details Ryu learns are written down in his notebook for future review. Ryu can buy items from stores or try his luck with capsule toy machines, but most items that can be bought have no purpose outside of filling his inventory. Ryu can also visit an arcade and play accurate versions of Hang-On and Space Harrier, as well as games like darts and pool.
The story follows Ryu Hazuki as he sets out to track down his father's murderer, Lan Di, after being beaten by him on a rainy day. Ryu must uncover his family's secrets and the mystery of the Phoenix and Dragon mirrors that Lan Di seeks.
Ryu is a trained martial artist, and while a true martial artist knows it is better to avoid a fight, sometimes it is still necessary. The fighting system is similar to that of Virtua Fighter series, although with toned-down air juggling. Ryu's training also gives him heightened reflexes, and sometimes during a cutscene the player will have only a moment to press a button (displayed onscreen) to get Ryu out of danger. Failing an input prompt is not always fatal, but whether Ryu survives or not depends on the danger he was in.
Included with the game is the Shenmue Passport disc, which provides tutorials, cutscene reviews, and music listening options. This disc also included the option to go online to a special site where players could review worldwide mini-game rankings, get hints from Nozomi, review game maps of Yokosuka, trade uncommon items for rarer ones, and visit the official homepage. This service is no longer available due to SegaNet going offline.