The Greek captivated Melbourne last year with his run to the semi-finals, including victory over Roger Federer in the fourth round.
But big-serving Canadian Raonic, who has endured wretched luck with injuries over the last few years, was resurgent and thoroughly deserved his 7-5 6-4 7-6 (2) victory.
The second seed hit 17 aces and lost just eight points on serve during the match, seven of them in the third set.
Djokovic, who has former Wimbledon champion Goran Ivanisevic among his team, said: "I love playing on the court. I like the conditions. I'm starting to feel very, very comfortable and compact on the court. I'm going to try to keep that going."
Hungary's Marton Fucsovics continued his fine tournament with a 6-1 6-1 6-4 victory over Tommy Paul while Tennys Sandgren, who reached the quarter-finals two years ago, defeated fellow American Sam Querrey 6-4 6-4 6-4.