Originally written as a sequel to Invasion U.S.A. (1985) with Chuck Norris returning in the role of Matt Hunter. When he was uninterested, the role was rewritten to be younger and given to rising Cannon star Michael Dudikoff instead. Despite sharing the same main character name, the finished film was no longer intended to be a sequel or prequel to the earlier film, but its own stand-alone movie.
This movie was released in Israel as "The American Ninja 2", which caused "American Ninja 2" to be released as "American Ninja 3", and so on. In fact, in Israel there are six movies in the "American Ninja" series.
Michael Dudikoff's career was on the rise, thanks to his previous Cannon outing American Warrior (1985). He was assured by Cannon heads Menahem Golan and Yoram Globus that his next few films for them would increase in budget and scope, but the company collapsed before this happened. While under contract with Cannon, Dudikoff was linked to every major production they had, including "Spider-Man" and Captain America (1979), sequels to Delta Force (1986) and "American Ninja".
Despite some positive reviews, cash-strapped Cannon Films could only release the film in 500 or so cinemas, severely limiting its box-office potential.