Saina and Sindhu won the first two singles to put the Indian team 2-0 ahead but they failed to win the third singles and the two doubles match to see their hopes go up in smoke at the Siri Fort Sports complex.
Olympic bronze medallist Saina gave India a positive start when she produced a dominating performance to get across world number 12 Minatsu Mitani 21-12 21-13 in a 41-minute match.
World number four pair of Misaki Matsutomo and Ayaka Takahashi, however, brought Japan back into the tie with a hard-fought 21-12 20-22 21-16 win over Commonwealth Games gold medallists Jwala Gutta and Ashwini Ponnappa.
And then PC Thulasi tried her bit before going down to 2011 All England Championship runners-up and world no 16 Eriko Hirose 14-21 15-21 in the third singles as Japan made it 2-2.
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Japan will now take on China in the finals tomorrow. China beat Korea 3-0 in another semifinal clash.
Earlier, Saina dominated the proceedings from the start and led 11-6 at the interval. Things didn't change much after the break as Saina kept engaging her rival in rallies and waited for Mitani to commit mistakes, to eventually pocket the game with a smart dribble at the net.
Saina came up with a series of sharp cross-court smashes to extend the lead and finally sealed the issue rather comfortably when Mitani hit wide.