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The daughter of notable Burmese newspaper publisher, editor and politician Edward Michael Law-Yone, Law-Yone was born in Mandalay but grew up in Rangoon. Her background is diverse, with one grandfather a merchant from Yunnan and another a colonial officer from Great Britain. Law-Yone states that she is "half Burman, a quarter Chinese and a quarter English".

Law-Yone has indicated that her father's imprisonment under the military regime limited her options in the country. She was barred from university, but not allowed to leave the country. In 1967, an attempt to escape to Thailand failed and she was imprisoned, but managed to leave Burma as a stateless person. She relocated to the United States in 1973, settling in Washington D.C. after attending college in Florida. In 1987, she was the recipient of a National Endowment for the Arts Literature Award for Creative Writing. In 2002, she received a David T.K. Wong Creative Writing Fellowship from the University of East Anglia.

Law-Yone cites as a strong influence on her writing career her father's love of language, noting that his work as the founder of Burmese English-language newspaper The Nation was a daily factor in her childhood.