Kagawa was born in Kobe, Japan to a philandering businessman and a concubine. However, both parents died while he was young. He was sent away to school, where he learned from two American missionary teachers, Drs. Harry W. Myers and Charles A. Logan, who took him into their homes.

Having learned English from these missionaries, Kagawa converted to Christianity after taking a Bible class in his youth, which led to him being disowned by his remaining extended family. Kagawa studied at the Tokyo Presbyterian College, and later enrolled in the Kobe Theological Seminary. While studying there, Kagawa was troubled by the seminarians' concern for technicalities of doctrine. He believed that Christianity in action was the truth of Christian doctrines. Impatiently, he would point to the parable of the Good Samaritan.

In 1909 Kagawa moved into a Kobe slum with the intention of acting as a missionary, social worker, and sociologist. In 1914, he went to the United States to study ways of combating the sources of poverty. In 1916 he published Researches in the Psychology of the Poor based on this experience in which he recorded many aspects of slum society that were previously unknown to middle-class Japanese. Among these were: the practices of illicit prostitution (i.e. outside of Japan's legal prostitution regime), informal marriages (which often overlapped with the previous), and even the practice of accepting money to care for children and then killing them.

Kagawa was arrested in Japan in 1921 and again in 1922 for his part in labour activism during strikes. While in prison he wrote the novels Crossing the Deathline and Shooting at the Sun. The former was a semi-autobiographical depiction of his time among Kobe's destitute. After his release, Kagawa helped organize relief work in Tokyo following the 1923 Great Kant? earthquake and assisted in bringing about universal adult male suffrage in 1925.

He organized the Japanese Federation of Labour, as well as the National Anti-War League in 1928. Throughout this period, he continued to evangelize to Japan's poor and push for women's suffrage and a peaceful foreign policy. Between 1926 and 1934, he focused his evangelical work through the Kingdom of God Movement.

In 1940, Kagawa made an apology to the Republic of China for Japan's occupation of China, and was arrested again for this. After his release, he went back to the United States in a futile attempt to prevent war between that nation and Japan. He then returned to Japan to continue his attempts to win women's suffrage. After Japan's surrender, Kagawa was an adviser to the transitional Japanese government.

During his life, Kagawa wrote over 150 books. He was nominated for the Nobel Prize in Literature in 1947 and 1948, and Nobel Peace Prize in 1954 and 1955. After his death, Kagawa was awarded the second-highest honor of Japan, induction in the Order of the Sacred Treasure. He is commemorated in the Evangelical Lutheran Church in America as a renewer of society on April 23 of the same year.

Kagawa's economic theory, as expressed in the book "Brotherhood Economics," advocated that the Christian Church, the cooperative movement, and the peace movement unite in a 'powerful working synthesis' to provide a workable alternative to capitalism, state socialism, and fascism.

In the 1930s, he addressed problems of soil erosion by persuading many of Japan's upland farmers to plant fodder trees to conserve soil, supply food and feed animals (the three "dimensions" of his system).

He was a forerunner of the modern forest gardening idea and an inspirer of Robert Hart who planted an inspirational forest garden at Much Wenlock, Shropshire, UK.

Kagawa is honored with a feast day on the liturgical calendar of the Episcopal Church on April 23.