At 120 in the world, the Japanese is the lowest-ranked player Murray has ever lost to at a grand slam, and he made no attempt to hide how much it hurt after going down 6-4 6-4 6-4.
"I'm really, really disappointed," said Murray. "Very frustrated. A tough loss for me that's for sure."
For all the high moments like his five-set win over Nikoloz Basilashvili in the first round on Tuesday, Murray desperately wants to be challenging in the latter stages of slams again and this was a dispiriting reality check.
The 34-year-old questioned his future after losing heavily in the third round of Wimbledon last year and it was on his mind again here.
Asked if he plans to be back in Melbourne next year, Murray said: "I mean, yeah. But not if I do what I did tonight too often this season.
"This is a really important year for me for a number of reasons and I want to perform well in the big events. For me, tonight is not good enough in that respect.
"Making second rounds of slams is not something I find particularly motivating. I want to be doing better than that. It depends on how I get on this year results wise and how I perform in the big events."
Hopes were high that Murray could have another strong run in Melbourne three years after it appeared his career had ended.
But, back on John Cain Arena, Murray struggled for sharpness against a tenacious and mobile opponent.
Daniel had won just five games over three sets in their only previous meeting in the 2016 Davis Cup but Murray, whose heavy workload also included reaching the final of the ATP Tour event in Sydney at the weekend, began sluggishly and was unable to turn the tide in his favour.
He had never lost to a player ranked outside the top 100 at a slam, with then world number 91 Arnaud Clement the previous lowest in the second round of the US Open back in 2005.
At 28, Daniel has spent much of his career hovering around the 100 mark but it is an indication of the depth in the game that he is an extremely solid and capable player, and deceptively quick around the court.
Murray said: "I made way too many errors today. There is maybe some reasons for that but he was solid the whole match.
"Didn't give me too many errors which, to be fair, was what I was expecting from him. He moves well, and he's very consistent. He doesn't give matches to you."
After dropping serve twice in the opening set, Murray saw four break points come and go in the second game of the second set - the Scot took only two of 11 in the match - and again it was Daniel that came up with the answers at the big moments.
Murray did finally move ahead early in the third but surrendered his advantage straight away and the end was nigh when Daniel broke to lead 5-4.
Murray received a warning for slamming his racket angrily to the court, and Daniel clinched his second match point to move through to the third round of a slam for the first time.
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