The company said it suffered losses of ¥2.39bn (€16.37m) for its April-June quarter, compared to profits of ¥982m in the corresponding quarter for 2005.
The news comes just one week after Japan's second largest cosmetics company, Kao, said that its quarterly profits had dropped 15 per cent to reach ¥12.8bn.
Shiseido said it had experienced strong sales in both Europe and the rest of Asia, but blamed tough condition in the domestic market as being the root cause for the losses.
Japanese retail manufacturers have been hit by higher marketing costs and rising taxes, which have contributed to a fiercely competitive retail environment. In the case of Shiseido this tough competition has also led to a fall in sales.
Overall sales for the quarter rose slightly to reach ¥166.5bn, up from ¥157.5bn in the corresponding quarter for 2005 - particularly buoyed by a better performance in western Europe and China.
But despite the fall in profits, the company says it is confident that it will be able to fulfill its full year predictions, reiterating that by March 2007 it should hit forecast profits of ¥23bn on sales of ¥685bn.
Likewise Kao also said that it was more confident of its full-year earnings, predicting that operating profits would grow 8 - 10 per cent.
Kao acquired the cosmetic operations of liquidated Kanebor last year and is now in a position to develop its position on the Japanese market, a move that puts the pressure on Shiseido.
Kao says that Kanebo cosmetics should add a further ¥200bn in sales this year, pushing up total sales for the financial by 25 per cent, to reach ¥1.210 trillion.
Financial analysts seem to be confident about the longer-term future of Japan's cosmetic industry, too.
Last week Moody's announced that it was maintaining its highest 'A-1' rating for Shiseido, stating that steady demand, a dominant market position and solid financial condition made the company a solid prospect.
Moody's did however point out that over the longer term Shiseido's position might look more threatening as Kao strives to consolidate its position on the Japanese cosmetic market.