Water Shuriken

I’m assuming you’re meaning Greninja’s Ability “Water Shuriken”

Dugtrio’s ability prevents damage from attacks and effects of attacks, sleep, poison, unable to retreat etc etc. It does not specify “negate all damage”

As “Water Shuriken” is an ability, it is not technically an attack or an effect or an attack so I would say that both Dugtrio’s “Dig” and Greninja’s “Water Shuriken” are both working correctly. Though I agree, it is silly in this case.