Crusaders head coach Scott Robertson said Ioane and the Crusaders had reached a mutual decision that staying in Japan was best for the 32-year-old.
Ioane, who earned 35 caps for Australia from 2007 to 2013, played just three Super Rugby games for the Crusaders in 2017, scoring one try against the Western Force.
His season was hampered by hand and hamstring injuries and he was unable to win back his place with Seta Tamanivalu and George Bridge in good form on the wings.
"We loved having Digby in our environment this year and he brought all of the energy and charisma that we knew he would," Robertson said.
"However, in talking to Digby since he has been in Japan and scoring tries left, right and centre for the Panasonic Wild Knights, we have mutually agreed that at this stage his rugby career is going to benefit from him focusing on that team," Robertson said.
It is Ioane's first season with the unbeaten Wild Knights, who currently leading the Japan Top League competition.
Ioane, who had earlier played in Japan for the Honda Heat, said he was loving the Wild Knights' environment and enjoying contributing to another winning team.
"The culture and values here at the Panasonic Wild Knights are similar to the Crusaders in many ways.
"When I moved to Christchurch this year and joined the Crusaders I started to love playing rugby again.
"That has continued here at Panasonic thanks to the professional standards that Robbie Deans demands and the supportive culture he has set up, so I am enjoying playing rugby right now as much as I ever have," Ioane said.
"It wasn't easy to make the decision not to return to the Crusaders in 2018, and I will miss my teammates and all of the other people I met while I was there. There is some awesome young talent in the Crusaders squad and I wish them all the best.
"For me, at this stage of my playing career, I am aware that I am much more likely to end up dealing with injuries at that Super Rugby level. It feels great to be injury free and getting regular game time at the moment so I know that this is the right thing for me.
"Now that the decision has been made I am excited to be able to put my full focus into this team and help them continue the successful run we've been enjoying so far."
Photo by: KAI SCHWOERER/ GETTY IMAGES (Caption: Digby Ioane scores his sole try for the Crusaders against the Western Force)