New Zealand held firm against 21 Japan shots to force penalties in a quarterfinal between underdogs and hosts on Saturday.
But the magic ran out in spot kicks when Japanese keeper Kosei Tane stopped New Zealand's Liberato Cacace and Clayton Lewis sent his kick nowhere near the goal.
Japan will face Spain in the semifinal after Rafa Mir's hat trick off the bench sent the Spaniards past Cote d'Ivoire in extra time.
Japan took 21 shots to New Zealand's eight, seven in the final half-hour, but couldn't get past New Zealand goalkeeper Michael Woud.
Takefusa Kubo and Ritsu Doan threatened plenty for Japan, while Chris Wood was New Zealand's best hope of finding a goal in regulation.
New Zealand lost West Ham center back Winston Reid to injury while Japan's former Premier League defender, Maya Yoshida, was a force and deservedly scored the clinching penalty.
