"It is still necessary to establish what their activities are at present and in the future," presiding judge Masayuki Fujiyama said.
The group, which was behind the 1995 Sarin gas attack on the Tokyo subway, had filed a lawsuit against the government, claiming police surveillance was unconstitutional.
But on Wednesday the Tokyo District Court dismissed the appeal.
"It is still necessary to establish what their activities are at present and in the future," presiding judge Masayuki Fujiyama said.
The police monitoring did not violate freedom of religion under the constitution, Mr Fujiyama said.
Aum spokesman Tatsuko Muraoka protested against the court judgement.
"We are not satisfied with the ruling. We want to consider appealing to a higher court," he told the Yomiuri Shimbun newspaper.
Several members of the sect have been sentenced to death for their part in the subway attack which killed 12 people and injured thousands of others. The cult, which changed its name last year to Aleph - the first letter of the Hebrew alphabet - insists it is now a benign religious group.
'Extremely grave'
The court ruling was the first judgement on official surveillance of a potentially dangerous group since police-monitoring legislation took effect in December 1999.
Police have launched a series of raids on the Aum cult since the Public Security Commission announced in January last year that it had put the sect under surveillance amid fears it could strike again.
Aum founder Shoko Asahara, whose real name is Chizuo Matsumoto, has been in custody since May 1995 while his trial on multiple charges, including murder and masterminding the subway attack, continues.
"It was reasonable to consider that Aum Shinrikyo may prepare for another indiscriminate mass murder, depending upon Matsumoto's wishes," he said.
"We cannot imagine that the group can change itself or reduce" Asahara's influence "in a short time."
The group has attempted to distance itself publicly from Asahara.
The sect currently numbers about 650 full-time leaders and teachers, and more than 1,000 followers, according to government reports.
Police have warned that the sect is expanding its operations via the internet and attempting to recruit elite graduate students.