The Spaniard, bidding for a record-equalling 20th Grand Slam title, but first in Australia since 2009, converted just three of his 20 break point opportunities in a 6-3 7-6 (4) 6-1 victory.
The final shot was a Williams backhand that hit the net, carrying her tally of unforced errors to a remarkable 56.
It was Williams's earliest exit from the year's first Grand Slam since 2006, when her title defence was ended by Slovak Daniela Hantuchova. "Honestly, I found a way to finally win that second set and in the third, I think I played a little bit more relaxed".
Wang said she had no plans to celebrate Chinese New Year on Saturday, preferring instead to rest up and prepare for her fourth-round encounter with Ons Jabeur. I really wish he could be here to watch me play. "Guess this is just how it was meant to be", added the Dane, who began playing tennis aged seven".
Djokovic will meet another Japanese player in Yoshihito Nishioka, who knocked out British 30 seed Dan Evans in straight sets, for a place in the fourth round.
The 2014 Australian Open champion, Stanislas Wawrinka from Switzerland, has also qualified for the second round, winning against Bosnian opponent Damir Dzumhur 3-1 with the sets of 7-5, 6-7, 6-4 and 6-4 in three hours.
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Friday's encounter was a world away from their quarterfinal meeting at the U.S. Open previous year, when it had taken Williams only 44 minutes to progress to the next round after a 6-1, 6-0 thrashing.
After reaching the quarterfinals in 2019 at the US Open, she climbed to the 12th spot in the world rankings, the second-highest player in history following only Li Na, who reached the No. 2 spot in 2014.
The match lacked nothing in quality power tennis but was nearly entirely devoid of drama and the most notable incident came late in the third set when the ball flew off top seed Nadal's racket and hit a ballgirl on the head.
She couldn't escape Qiang Wang, though, who beat Williams (6-4, 6-7, 7-5).
"It's not possible. But I know I can back up my serve with good game from the back of the court".
"It was one of the more scary moments I've had on a tennis court, because the ball went straight at her head".