Murray lost 6-3 6-7 7-6 .
Murray's frustration boiled over on several occasions, the Olympic champion smashing another racquet and yelling furiously at himself as Raonic saved two match points.
Murray was broken by the Canadian in the first game and a huge forehand by Raonic on his first set point forced the Scot into a shanked backhand which flew high into the crowd.
Murray faced break points in the second set and angrily trashed his racquet for the second match in a row as sixth seed Raonic continued to blast winners past him.
But Murray dug in to win the tiebreak 7-5 on a fizzing backhand return onto the laces of Raonic on his first bite at the cherry.
Raonic, who has been taking rickshaw rides around ancient Tokyo and taking a keen interest in samurai swords, staved off two match points in the decider to force another tiebreak.
Raonic clinched victory with another vicious serve out wide that Murray could only slam long after two hours, 46 minutes.
Raonic will face either local favourite Kei Nishikori or Cypriot Marcos Baghdatis in Sunday's final of the $1.28 million hardcourt tournament. – Reuters