The former world number one was beaten 6-3, 7-5 by Slovakian teenager Mia Pohankova, an 18-year-old ranked 144th in the world, to bow out of her home tournament in Tokyo on Thursday.
Osaka, a four-time Grand Slam champion, has endured a challenging year since returning from a 15-month maternity break following the birth of her daughter, Shai, in 2023.
Now ranked 18th in the world, the Japanese star insisted she remained positive about her progress and still wants to contend for Grand Slam victories.
"Obviously, when I play a Slam, it's in my mind to challenge for it," Osaka said after Thursday's straight-sets loss.
"Unfortunately, I haven't been in that position yet, and I'm going to keep attempting it.
"But if you're asking me how I think my tennis is, I think it's pretty good."
The 29-year-old arrived wearing a striking red kimono-style gown with a long, frilly train. Osaka also revealed that she had several more outfits prepared for the Tokyo crowd, although her early exit meant she would not get the opportunity to show them off.
The Japanese star has become renowned for her elaborate, custom-designed outfits, which have become a feature of her walk-outs at major tournaments.
Earlier in the day, world number one Elena Rybakina continued her progress with a comfortable 6-2, 6-3 victory over compatriot Yulia Putintseva.
Rybakina's victory confirmed that she will finish the year as the WTA's world number one.