Janet Frame was born in Dunedin in the south-east of New Zealand's South Island as the third of five children of Scottish New Zealander parents. She grew up in a working class family. Her father, George Frame, worked for the New Zealand railways, and her mother Lottie (née Godfrey), served as a housemaid to the family of writer Katherine Mansfield. New Zealand's first female medical graduate, Dr Emily Hancock Siedeberg, delivered Frame at St. Helen's Hospital in 1924.

Frame spent her early childhood years in various small towns in New Zealand's South Island provinces of Otago and Southland, including Outram and Wyndham, before the family eventually settled in the coastal town of Oamaru (recognisable as the "Waimaru" of her début novel and subsequent fiction). As recounted in the first volume of her autobiographies, Frame's childhood was marred by the deaths of two of her adolescent sisters, Myrtle and Isabel, who drowned in separate incidents, and the epileptic seizures suffered by her brother George (referred to as "Geordie" and "Bruddie").

In 1943 Frame began training as a teacher at the Dunedin College of Education, auditing courses in English, French and psychology at the adjacent University of Otago. After completing two years of theoretical studies with mixed results, Frame started a year of practical placement at the Arthur Street School in Dunedin, which, according to her biographer, initially went quite well. Things started to unravel later that year when she attempted suicide with a packet of aspirin. Frame began regular therapy sessions with junior lecturer John Money, to whom she developed a strong attraction, and whose later work as a sexologist specialising in gender reassignment controversial.

In September 1945, Frame abandoned her teacher-training classroom at Dunedin's Arthur Street School during a visit from an inspector. She was then briefly admitted to the psychiatric ward of the local Dunedin hospital for observation. Frame was unwilling to return home to her family because of tension between her father and brother. Instead, she was committed to Seacliff Lunatic Asylum. During the next eight years, Frame was repeatedly readmitted, usually voluntarily, to psychiatric hospitals in New Zealand. These included Avondale, in Auckland, and Sunnyside in Christchurch. During this period, Frame was first diagnosed as suffering from schizophrenia, which was treated with electroconvulsive therapy and insulin.