The confusion of the Ki-61 with German and Italian fighters had some basis in the aircraft's origins. Between 1923 and 1933, Kawasaki Aircraft Engineering Company's head designer was a German named Dr. Richard Vogt, who returned to Germany in 1933 to take a similar position at the firm of Blohm und Voss during the war. Not surprisingly, Kawasaki continued to be strongly influenced by Dr. Vogt's beliefs after he left, particularly a faith in the usefulness of liquid-cooled inline engines. This made Kawasaki something of a heretic among Japanese aircraft manufacturers, who preferred air-cooled radials.

In March 1938, Kawasaki signed an agreement with Daimler-Benz of Germany for obtain manufacturing rights to the liquid-cooled inline engines then under development by the German firm. In April 1940, a Kawasaki engineering team visited Daimler-Benz in Stuttgart to obtain plans and samples of the DB 601A engine, then being used in the Me-109. The Kawasaki engine team managed to increase the takeoff power of their version of the engine to 1,175 HP, and reduce its weight slightly. The engine was put into production in November 1941. It was designated the Ha-40, or Army Type 2, though it would be later redesignated the Ha-60 in a combined Army/Navy nomenclature.

In the meantime, certain officers at the Air Headquarters of the Imperial Japanese Army were very interested in the liquid-cooled inline powered fighters being developed in Britain, the USA, the USSR, Germany, and France. The Japanese Army also had unpleasant experience in air combat against the Soviet Polikarpov I-16 during the beating the Imperial Army took in their Manchurian border clash with the USSR in 1939. This experience suggested that the single-minded focus on agility above all that characterized Japanese fighter design doctrine might need to yield to a focus on speed and improved armor protection and firepower.

In February 1940, the Army initiated work with Kawasaki on two single-seat fighters based on the dB 601 derivative engine: a heavy interceptor, designated the Ki-60, and a general-purpose fighter, designated the Ki-61. Kawasaki decided to build the Ki-60 first, and the design team, under Kawasaki chief designer Takeo Doi and his deputy Shin Owada, constructed three prototypes of the interceptor in 1941.

The Ha-40 engine was not available at that time, so the three aircraft were powered by some of the sample dB 601 engines obtained from Germany. The Ki-60 was a low-wing monoplane, with plenty of power and heavy armament by Japanese standards. The new fighter had two 12.7 millimeter guns mounted on the nose in front of the pilot and two 20 millimeter Mauser MG-151 cannons, one mounted in each wing. Flight tests began in March 1941 and showed that the Ki-60 had unpleasant handling characteristics. The aircraft didn't meet its performance specs, various tweaks to improve the aircraft failed, and the Ki-60 was abandoned.

The experience was valuable, however. Design work on the Ki-61, whose development had been proceeding in parallel with the Ki-60 since December 1940, incorporated new features using the lessons learned by the Ki-60 program:

Aerodynamic refinements were added.
The wing was increased in size and length to improve maneuverability.
The fuselage was slimmed down to improve speed.
Armament was reduced by replacing the two 20 millimeter guns in the wings with either two 12.7 millimeter guns or two 7.7 millimeter guns.
Fuel capacity was increased, as required by offensive fighter operations, which dictated longer range than required by an interceptor.
The landing gear track was widened to allow use from primitive forward airfields.

The first prototype was rolled out in early December 1941, and its performance delighted its designers. 11 more prototypes were delivered to the Army, which performed intensive trials with them. The Ki-61 was pitted against other Japanese fighters, as well as against the Messerschmitt Bf-109E-3, of which two had been bought by the Army from the Germans, and the Curtiss P-40E, several of which had been captured during the seizure of the Dutch East Indies.

While the test pilots were a little skeptical of the new aircraft at first, pilots with combat experience appreciated the Ki-61's self-sealing fuel tanks, heavier armor and armament, and fast diving speed. The air combat tests showed the Ki-61 to be faster than all its adversaries in the tests, and easily outmaneuvered all of them except the Japanese Ki-43 ("Oscar").

The 13th Ki-61, a production prototype, was delivered in August 1942. The Army gave the production go-ahead, and the fighter began to roll off the assembly line, with 34 delivered by the end of 1942. The type was formally known as the Army Type 3 Fighter Model 1 "Hien" (Swallow), or Ki-61-I. Initial production consisted of two variants: the Ki-61-Ia, with 12.7 millimeter guns in the fuselage and 7.7 millimeter guns in the wings, and the Ki-61-Ib, with 12.7 millimeter guns in both fuselage and wings. These aircraft could be fitted with two 200 liter (53 US gallon) drop tanks.

The Hien entered combat in the spring of 1943 in the New Guinea war zone, covering New Guinea, the Admiralty Islands, New Britain, and New Ireland. The new Japanese fighter caused some pain and consternation among Allied pilots, particularly when they found out the hard way that they could no longer go into a dive and escape as they had from lighter Japanese fighters. 5th Air Force Commander General George Kenney found his P-40 Warhawks completely outclassed, and begged for more P-38 Lightnings to counter the threat of the new enemy fighter.

The Ki-61 demonstrated only a few teething problems in field use, such as a tendency towards engine overheating during ground operations under tropical conditions. However, despite the heavier armament, it still didn't have the punch to easily knock rugged and well-armed Allied bombers out of the sky. The Kawasaki designers had forseen this problem. The Japanese Ho-5 20 millimeter cannon wasn't available at the time, but the Japanese obtained 800 Mauser MG-151 20 millimeter cannon from Germany in August 1943, and modified 388 Ki-61-I airframes to carry the German weapons in place of the two 12.7 millimeter wing guns. Once the Ho-5 cannon became available, Kawasaki designers then reversed the arrangement of the guns, putting the 20 millimeter guns in the forward fuselage and the 12.7 millimeter guns in the wings. While they were making these modifications, they also made a few changes to streamline manufacturing and simplify field maintenance.

This new variant was designated the Ki-61-I KAIc (where "KAI" was for "kaizo", or "modified) was 19 centimeters (7.5 inches) longer than its predecessors, with a detachable rear section, a fixed tailwheel instead of the retractable tailwheel previously used, stronger wings, and stores pylons outboard of the main landing gear, allowing it to carry two 250 kilogram (550 pound) bombs.

The Ki-61-I KAIc went into production in January 1944, and ultimately replaced production of all earlier models in August 1944. The Ki-61-I KAIc would become the heavily-produced version of the Hien, accounting for over half the total number built. A few Ki-61-I KAId bomber interceptors were also built in late 1944. These variants incorporated two 12.7 millimeter guns in the fuselage and a 30 millimeter gun in each wing.