During World War I, Japan presented its '21 demands' to China. In 1931, Japan occupied Manchuria and tried to detach China's northern provinces, leading to open war in 1937. Canton fell to the Japanese in 1938, resulting in a mass flight of refugees to Hong Kong. It was estimated that some 100 000 refugees entered in 1937, 500 000 in 1938 and 150 000 in 1939 — bringing Hong Kong's population at the outbreak of World War II to an estimated 1.6 million. It was thought that at the height of the influx, about 500 000 people were sleeping in the streets.

Japan entered World War II on December 7, 1941, when its aircraft bombed United States warships at Pearl Harbour. At about the same time, Japanese armed forces attacked Hong Kong (December 8, 1941, Hong Kong time). They invaded Hong Kong across the border from China and pushed the British from the New Territories and Kowloon on to Hong Kong Island. After a week of stubborn resistance on the island, the defenders — including the Hong Kong Volunteer Defence Corps — were overwhelmed and Hong Kong surrendered on Christmas Day.

The Japanese occupation lasted for three years and eight months. Trade virtually disappeared, currency lost its value, food supplies were disrupted, and government services and public utilities were seriously impaired. Many residents moved to Macao — the neutral Portuguese enclave hospitably opening its doors to them. Towards the latter part of the occupation, the Japanese sought to ease the food problems by organising mass deportations.

In the face of increasing oppression, the bulk of the community remained loyal to the allied cause. Chinese guerrillas operated in the New Territories, and escaping allied personnel were assisted by the rural population. Soon after news of the Japanese surrender was received on August 14, 1945, a provisional government was set up by the Colonial Secretary, Mr (later Sir) Frank Gimson, who had spent the occupation imprisoned in Stanley Gaol. On August 30, Rear Admiral Sir Cecil Harcourt arrived with units of the British Pacific Fleet to establish a temporary military government. Civil government was formally restored on May 1, 1946, when Sir Mark Young resumed his interrupted governorship.