US Open finalist Nishikori thrilled his 10,000-strong home crowd by taking the win in just over two hours, overcoming 22 aces by the hard serving Raonic.
The defeat was a tough one for the 23-year-old Thornhill, Ont. native. Raonic has yet to win the Japan Open title, losing last year in the final to Argentina's Juan Martin del Potro and in 2012 to Nishikori.
"It is disappointing to lose in my third straight [Tokyo] final," he said. "To be honest with you, other than the first year  I felt I created my opportunities."
The match was played under the closed roof of the Ariake Colosseum as heavy rain from an approaching typhoon drummed down.
"It was a great match. We both played a high level of tennis," said Raonic.
The third seeded Raonic fired ten of his aces in the opening set, where he also produced three love games in a formidable display. But it wasn`t enough to intimidate the fourth seeded Nishikori.
Raonic lost the first set after 48 minutes in a tiebreaker but went up a break on Nishikori for 4-3 in the second, following with another love game and levelling the sets at one each with his 16th ace.
But in the third set, Nishikori broke in the final game, taking the title on the second of three match points in a contest where Raonic only lost serve once.
The Japanese player has now beaten Raonic in three of their four meetings this year, with the Canadian earning his lone victory at Wimbledon in the fourth round.
Raonic, however, can still qualify for the ATP World Tour Final, an elite eight-man season-ending tournament to be held next month in London, England.
After just missing the cut last year, he currently holds the eighth spot in the standings, with seven tournaments left on the ATP calendar over the next four weeks.
Raonic next heads to Shanghai for the Masters 1000, and despite his loss Sunday, Raonic indicated he remains confident in his game.
"I'm playing at a really high level. The match was high quality and I look forward to the next challenge in Shanghai. I need to turn up there with the right attitude and fight again," he said.
Raonic defeated Vancouver native Vasek Pospisil to win the Washington trophy in August after achieving a Wimbledon semi-final. He then went on to a fourth round loss to Nishikori at the US Open.