The threat materialized gradually. In August 1940, the German surface raider Orion became the first Axis warship in Australian waters, entering the Coral Sea and reaching a point 120 nautical miles northeast of Brisbane before sinking merchant ships in the Tasman Sea. That October, the raider Pinguin and a captured Norwegian tanker, Storstad, laid mines along Australia's eastern and southern coasts without detection. Their mines sank three ships, including the American City of Rayville off Cape Otway, and damaged the British steamer Hertford in Spencer Gulf. In December, Orion and Komet attacked shipping off Nauru, sinking four vessels and shelling the island's phosphate facilities. These raids triggered serious anxiety about Australia's isolated island dependencies and prompted the first Trans-Tasman commercial convoys. But the most devastating encounter came on 19 November 1941, when the light cruiser HMAS Sydney met the disguised German raider Kormoran off Western Australia. Both ships were destroyed, and all 645 of Sydney's crew perished, the greatest loss in Royal Australian Navy history.

Japan's entry into the war in December 1941 transformed sporadic raids into a sustained campaign. Four Japanese submarines laid minefields near Darwin and in the Torres Strait in January 1942, and the Australian corvettes Deloraine, Katoomba, and Lithgow sank I-124 near Darwin, the only full-sized submarine confirmed sunk by the RAN in Australian waters. The bombing of Darwin on 19 February was the heaviest single Japanese attack on the Australian mainland, but it was only the beginning. Broome was devastated on 3 March when Japanese fighters killed at least 88 people. Over the course of 1942 and 1943, Japanese aircraft made almost 100 raids on northern Australia. A floatplane from submarine I-25 overflew Sydney, Melbourne, and Hobart on reconnaissance missions in February and March 1942, photographing harbor defenses that would soon face direct assault.

On the night of 31 May 1942, three Japanese midget submarines launched from mother boats outside the Sydney Heads and slipped into the harbor. Two penetrated the incomplete boom defenses. One fired torpedoes at the American heavy cruiser USS Chicago, missing her but sinking the depot ship HMAS Kuttabul, killing 21 seamen, and damaging the Dutch submarine K9. All three midget submarines were lost. In the days that followed, I-24 bombarded Sydney's eastern suburbs and I-21 shelled Newcastle, where Fort Scratchley returned fire without scoring a hit. The attacks generated widespread alarm along the east coast and prompted the institution of convoys between Brisbane and Adelaide. All ships over 1,200 long tons traveling at less than 12 knots between east coast cities were required to sail in convoy. By war's end, the RAAF and RAN had escorted over 1,100 convoys along the Australian coastline.

The single greatest loss of life from a submarine attack in Australian waters occurred in the early hours of 14 May 1943, when I-177 torpedoed the hospital ship Centaur off Point Lookout, Queensland. Clearly marked with a red cross and fully illuminated, Centaur sank in less than three minutes, taking 268 people with her. Whether Commander Hajime Nakagawa knew he was attacking a hospital ship remains uncertain, though his later conviction for machine-gunning survivors of a British merchant ship in the Indian Ocean suggests at minimum a pattern of disregard for the laws of warfare. The attack sparked public outrage across Australia. By mid-1943, however, the Japanese submarine offensive was broken as boats were redeployed to counter Allied advances elsewhere in the Pacific. Coastal convoys south of Newcastle ceased in December 1943, and the threat to Australian shipping effectively ended.

One final chapter unfolded in the war's closing months. In late 1944, Grand Admiral Karl Donitz dispatched three German U-boats from Asian bases to tie down Allied anti-submarine assets in Australian waters. Allied codebreakers intercepted the orders, and two of the three submarines were sunk before reaching Australia. The sole survivor, U-862 under Korvettenkapitan Heinrich Timm, arrived off Western Australia on 26 November 1944. Warned of its approach, Australian authorities redirected shipping from normal routes, and Timm found empty seas for weeks. On Christmas Eve, U-862 sank the Liberty ship Robert J. Walker off New South Wales. After an unproductive patrol off New Zealand, Timm sank one more Liberty ship, Peter Silvester, southwest of Fremantle on 6 February 1945, the last Allied vessel destroyed by the Axis in the Indian Ocean. Meanwhile, in January 1944, a small Japanese reconnaissance party had briefly landed on the Kimberley coast from a converted fishing boat, the only known Japanese landing on the Australian mainland. They found no people and nothing of military value, and returned to Timor.