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 â a handheld drum that twists back and forth illustrating the "drum technique", a block-and-defense karate move that Daniel begins to practice.
Daniel accidentally exposes corruption in Chozen's grocery business during an encounter in the village. Chozen later accuses Daniel of insulting his honor, and they have a series of confrontations. Their feud comes to a head when Chozen and his friends attack Daniel and vandalize Miyagi's family property. The group is quickly defeated and runs off after Miyagi arrives. Miyagi and Daniel plan to return home before the situation gets worse, however Sato shows up with bulldozers and threatens to destroy the village if Miyagi refuses to fight. Forced to comply, Miyagi gives in on the condition that Sato signs the village's land title over to the villagers regardless of the fight's outcome. Sato initially balks, but agrees after Miyagi describes the condition as a "small price" to pay for honor.
On the day of the fight, a typhoon appears. Villagers take cover at a nearby shelter, but Sato becomes trapped when his family's dojo is leveled by the storm. Miyagi and Daniel rush to rescue him. Arriving at the shelter, Daniel attempts to rescue a child trapped in a nearby bell tower. Sato orders Chozen to help, but when he refuses, Sato rushes to assist Daniel himself. He disowns Chozen for refusing to cooperate, and Chozen runs off into the storm out of anger. The next morning, as the villagers are rebuilding, Sato returns with his bulldozers â only this time to help rebuild. Sato hands over the land title to the village and asks for Miyagi's forgiveness. Miyagi gladly accepts. Daniel and Kumiko approach Sato about hosting the upcoming O-bon festival in a nearby ceremonial castle, and he accepts.
While Kumiko is performing a dance at the festival, a now-vengeful Chozen ziplines into the presentation, taking her hostage. He demands to fight Daniel alone. Daniel fights well, but is eventually overwhelmed by Chozen who gains the upper hand. Miyagi and the crowd respond by twisting handheld drums they brought to the celebration, inspiring Daniel. Chozen, seemingly confused, closes in for the kill, but Daniel is able to deflect Chozen's attacks and land counter-attacks using the drum technique. Daniel grabs the vanquished Chozen, raising his hand and threatening to end Chozen's life saying, "Live or die, man!" Chozen chooses death, but reminiscent of the way Miyagi handled Kreese earlier, Daniel tweaks Chozen's nose and playfully drops him to the ground. Daniel embraces Kumiko, while Miyagi looks on proudly.
Who exposes the corruption in Chozen's grocery business?
Daniel