The Socceroos' record 11-game World Cup qualifying run is over, with an Aziz Behich own goal securing Japan a 2-1 win in Saitama on Tuesday.
A thunderbolt of a free kick from Adjin Hrustic in the 69th minute had drawn Australia level after Japan scored early through Ao Tanaka, but Behich was helpless to stop the ball deflecting off his leg after Mat Ryan palmed a shot onto the post in 85th minute.
The loss is Australia's first on the road to Qatar 2022 and extends their wait for a win over the Asian powerhouse having last defeated Japan in 2009.
Defeat enabled Saudi Arabia to move three points clear in Group B following a 3-2 defeat of China. Australia remain in the second automatic qualifying place with nine points.
A further three points adrift are Japan and Oman - who defeated Vietnam 3-1 in the group's other match.
Third place carries entry into a series of play-offs.
"The win record's over, but we still hold that record and it's a fantastic achievement by the players," coach Graham Arnold said.
"We can stop talking about that now and we can move forward now with the World Cup campaign.
"We're still in a great position ... tonight Japan came out, we had a great crack at them and they had a crack at us.
"It was an exciting game to watch ... I was very, very proud of the boys and what they did."
Behich's misfortune compounded a bad night for the Australian left-back, who was at fault for Japan's eighth-minute opener when he missed a clearance and Tanaka pounced to score his first goal for his country.
That was a perfect start for the hosts, who came into the match under huge pressure after losing two of their first three fixtures.
The lead allowed Japan to settle into a rhythm of patiently waiting before pouncing on any Australian mistake and launching into a counter-attack.
That tactic should have brought a second goal for the hosts in the 35th minute when Yuya Osako skewed his shot wide after driving into the box before Australia almost forced an equaliser out of nowhere six minutes later.
Adam Taggart powerful drive was deflected onto the post by Shuichi Gonda and Aaron Mooy - making his first start for the Socceroos since November 2019 - was unable to beat the scrambling Japanese defence with his follow-up effort.
Mooy gave Japan an early warning in the second half when he flashed a shot wide of the goal but it was Hrustic who stepped up to put the Socceroos' level after a dramatic sequence.
The German-based attacking midfielder was caught on the edge of the box by Hidemasa Morita as he ran onto a Martin Boyle cutback.
The referee initially awarded a penalty to Australia but as Boyle waited to take the spot kick, VAR ruled the offence had happened outside the box.
In mattered not though as Hrustic slammed his shot home to score his second goal for the Socceroos.
"We got ourselves back in the game really well and I think we deserved more," Hrustic, who was named played of the match, said.
Japan responded and forced Ryan into several key saves, before finding a way to win in the dying minutes to make it no wins in nine trips to Japan since 1994.
The Socceroos' next match is a crucial game against Group B leaders Saudi Arabia on November 11, which Australia are hopeful of hosting in Sydney for just their second game on home soil in this qualifying campaign.
In Asian qualifying's other group Iran and South Korea remain in line to qualify after a 1-1 draw in Tehran. Alireza Jahanbakhsh's late header kept Iran two points clear after Son Heung-min had scored early in the second half.
Lebanon, who beat Syria 3-2 in Jordan are in the play-off slot three points behind.
Two points further back are UAE and Iraq, who drew 2-2 in Dubai with both teams scoring in the closing minutes.
Australian Associated Press