Australia booked their place in the semi-finals of the competition despite the 32-run defeat and Bailey believes that his side deserved to be beaten in Colombo.
The T20 captain said: "Pakistan outplayed us. The ball turned more, they used spin against us well. I wanted my top-order batsmen to do the majority of the scoring, but they didn't."
Bailey also claimed that Australia were not too reliant on all-rounder Watson, after the 31-year-old failed with the bat for the first time in the tournament.
"We don't just depend on Shane. We also depend on Mike [Hussey] and Mitchell Starc too. Watson is so good that he overrides all performances. He is in top form," he added.
Australia will play the West Indies in the second semi-final on Friday, while Sri Lanka play Pakistan on Thursday.