It's another dent to the American's bid for a record-equalling 24th Grand Slam tennis title.
She took time to wave and show her thanks to the crowd as she exited the court following the defeat (pictured above).
Williams was outplayed by Osaka, who won 6-3, 6-4 in Melbourne to reach her fourth Grand Slam final.
The Japanese star will face another American, Jennifer Brady, in the Melbourne final on Saturday.
But much of the focus after Thursday's last-four results was on whether this would be Serena's final appearance at the Aus Open, where she has won seven titles.
When asked that question in her post-match news conference, the four-time Olympic gold medallist was clearly emotional, and said, "I don't know, if I ever say farewell I wouldn't tell anyone, so...."
She added "I don't know. I'm done," while leaving the room.
The 39-year-old's last major event win was four years ago, before the birth of her daughter.
Serena and her coach Patrick Mouratoglou both brushed off retirement talk ahead of this season, stating that the Grand Slams were her main aims.
Williams also posted a message to the Australian Open tournament fans on Instagram after her exit, saying, "I only wish I could have done better for you today. I am forever in debt and grateful to each and every single one of you. I love you."
For fellow American Brady, it'll be her first appearance in a Grand Slam final.
She beat Karolina Muchova 6-4, 3-6, 6-4 in an epic Melbourne Park semi, saying afterwards, "I can't feel my legs."
Her opponent for the trophy on Saturday, Osaka has won all three Grand Slam finals she's previously played in.
She's a home hope for a medal at the upcoming Tokyo 2020 Olympic Games in 2021.
The Japanese 23-year-old wore an L.A. Lakers basketball top to her News conference, telling assembled media about her win over Serena, "For today I felt like I needed some extra strength, so yeah, that's kind of why I'm wearing this."