While Japanese bombers were striking Darwin and other northern towns, the Japanese Navy was attacking mainland cities on Australia's eastern coast.

On the night of 31 May 1942, three Japanese midget submarines were launched from large mother submarines off Sydney Heads and entered Sydney Harbour. The midget submarines slipped through the boom defences by following in the wake of a ship entering the harbour. A patrol boat spotted the conning tower of one of the midget submarines and raised the alarm. Depth charges were dropped and appeared to destroy the enemy submarine. The remaining two midgets fired torpedoes at cruisers and destroyers at anchor in the harbour. One midget fired its torpedoes at the American heavy cruiser Chicago, but the torpedoes missed Chicago and one of them struck and sank an old harbour ferry which had been converted into an Australian navy barracks ship, HMAS Kuttabul, killing nineteen sailors. No other damage was caused by the midget submarines, and only one escaped from Sydney Harbour. It never returned to its mother submarine waiting outside the Heads.

One of the three Japanese midget submarines that entered Sydney Harbour on the night of 31 May 1942 is raised from the bed of the harbour. This one was sunk before it could fire its torpedoes. The Royal Australian Navy barracks ship HMAS Kuttabul was sunk during this attack and nineteen sailors were killed.

One of the Japanese midget submarines was recovered from the bed of Sydney Harbour, and it is now on display at the Australian War Memorial in Canberra.

Enemy submarine activity continued throughout 1942 on Australia's eastern coast. On the night of 7 June 1942, Japanese submarines shelled Sydney and Newcastle. Off the coast of Australia, Japanese submarines were sinking Australian shipping. To many Australians, a Japanese invasion of their country appeared imminent.