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Yuichi Komano hit the crossbar on the third penalty, while substitute Oscar Cardozo walked up casually and scored the winning kick.
Paraguay will face either Spain or Portugal in the quarterfinals.
Both teams played cautiously at Loftus Versfeld, but both teams had chances to score.
Paraguay dominated possession in the first half, but Japan had the better chances. Midfielder Daisuke Matsui intercepted a poor clearance from the Paraguay defense and his shot from 25 meters (yards) hit the crossbar in the 22nd. Keisuke Honda curled a shot just wide from the edge of the area after a quick break down the right by Matsui in the 40th.
Paraguay forward Lucas Barrios latched onto to a through ball in the 20th and sidestepped the last defender into the penalty area, but his weak shot with the outside of his foot went straight at Japan goalkeeper Eiji Kawashima.
Roque Santa Cruz wasted a good chance for Paraguay just before the half hour mark when a corner glanced off another player and fell to him about six meters (yards) out, but the striker’s shot went wide of Kawashima’s left post.
There was more of the same in the second half, with Paraguay dominating possession but doing little with it.
Japan left back Yuto Nagatomo’s close-range shot in the 54th deflected off a Paraguay defender straight at goalkeeper Justo Villar. Japan center back Yuji Nakazawa made a crucial block in the 56th of a close-range shot by Edgar Benitez and the ball went out for a corner.
Paraguay midfielder Christian Riveros then headed straight at Kawashima in the 59th.
Paraguay had the best chance in the first period of extra time when Claudio Morel cut in from the left and fed the ball to a sliding Nelson Valdez in the 97th, but the substitute’s shot went straight to Kawashima.
Japan’s prowess from free kicks nearly paid off again in the 98th when Honda forced a save by Villar. The Asian team pressed for a winner late in extra time, but didn’t have enough players forward when a cross went across the face of goal with no Paraguay defenders covering the empty space.
The South Americans have conceded only one goal, against Italy, in the tournament.
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