Reigning Olympic champion Li picked up the injury during her 21-14 21-16 semi-final loss to Spanish top seed Carolina Marin on Thursday, Kyodo reported, citing the Nippon Badminton Association.
Okuhara lost to India's P.V. Sindhu in the other semi-final.
Examinations showed that Li tore her anterior cruciate ligament and also injured the lateral meniscus, Chinese head coach Li Yongbo told China's Xinhua News Agency.
"She already did a great job in the competition," Li said about his player.
Li's injury adds to a below par Olympic badminton tournament for Chinese shuttlers, who won all five golds at the London 2012 Games but have so far only picked up one bronze in Rio.
China still have a chance to land gold in the men's singles and men's doubles tournaments.
(Reporting by Ian Rodricks in Bengaluru; Editing by Andrew Hay and Patrick Johnston)
