Furious over the loss at the All-Valley Karate Tournament, John Kreese attacks Johnny in the parking lot. Miyagi confronts Kreese and passively immobilizes him. Miyagi threatens to strike a deadly blow but instead comically tweaks Kreese's nose and walks away.

Six months later, Miyagi receives a letter notifying him that his father is dying. He plans to return to his home village in Okinawa, and Daniel accompanies him. Miyagi tells Daniel about why he left Okinawa many years ago. He fell in love with a woman named Yukie, who was arranged to marry his best friend Sato, son of the richest man in the village and fellow karate student of his father. Upon announcing his intentions to marry Yukie, Sato challenged him to a fight to the death. Rather than fight, however, Miyagi left the country.

In Okinawa, Miyagi and Daniel are greeted by Chozen Toguchi, who drives Miyagi and Daniel to one of Sato's warehouses, where he reveals he's Sato's nephew. Sato appears and demands to fight Miyagi, who adamantly refuses. Arriving at the village, Miyagi and Daniel are welcomed by Yukie and her niece Kumiko. They discover that Sato has become a rich industrialist whose supertrawlers have destroyed the local fish population impoverishing the other villagers. They are forced to rent property from Sato, who owns the village's land title. Yukie reveals that she never married Sato, because of her love for Miyagi. After Miyagi's father dies, Sato gives him three days to mourn out of respect before their fight. Miyagi shows Daniel the secret to his family's karate – a handheld drum that twists back and forth illustrating the "drum technique", a block-and-defense karate move that Daniel begins to practice.