With third seed Maria Sharapova and world number one Serena Williams both losing in the fourth round, Azarenka has firmed as favourite to retain her crown and become the first woman to win three successive Melbourne Park titles since Martina Hingis (1997-99).
Azarenka and Stephens had played a controversial match in the semi-finals last year and their clash on Monday had the potential for more when Stephens blasted a shot back at Azarenka that hit her in the upper thigh in the first set.
The Belarusian appeared to ignore Stephens' apology and repaid the American with a similar shot shortly afterwards. Azarenka then controlled the match from the baseline and waited for the 20-year-old to make errors, wrapping up the win in 91 minutes.
(Reporting by Greg Stutchbury in Wellington; Editing by Peter Rutherford)