The Ki-32 was developed in response to a May 1936 Imperial Japanese Army specification to replace the Kawasaki Ki-3 light bomber with a completely indigenously designed and built aircraft. Mitsubishi and Kawasaki were requested to build two prototypes each by December 1936. The specification called for a top speed of 400 km/h (250 mph) at 9,800 ft (3,000 meters); normal operating altitude from 6,500 ft to 13,000 ft (2,000 to 4,000 meters), the ability to climb to 9,800 ft (3,000 meters) within 8 minutes and an engine to be selected from the 825 hp (620 kW) Mitsubishi Ha-6 radial, 850 hp (630 kW) Nakajima Ha-5 radial, or 850 hp (630 kW) Kawasaki Ha-9-IIb liquid-cooled inline engines, a normal bomb load of 661 lb (299.8 kg) and a maximum of 992 lb (450.0 kg), one forward-firing machine gun and one flexible rearward-firing machine gun, the ability to perform 60-degree dives for dive bombing, and a loaded weight less than 7,275 lb (3,299.9 kg).
The first Kawasaki prototype flew in March 1937; seven more prototypes were produced. Being very similar in layout and performance, main difference between the Kawasaki Ki-32 and its Mitsubishi Ki-30 rival was in the choice of an engine. The Mitsubishi design used the Nakajima Ha-5 14-cylinder air-cooled radial engine, whereas Kawasaki opted for their own Kawasaki Ha-9-II inline V12 engine.
Problems were encountered with the Kawasaki design, particularly with engine cooling, and the Mitsubishi Ki-30 received the production order. In spite of this, the pressing need for more aircraft in the Second Sino-Japanese War, which had started at full scale in July 1937, resulted in the Ki-32's entry into production as well, 12 months behind its rival. Ironically, the number of Ki-32s built was much higher than that of the successful Ki-30.
The Ki-32 entered production in 1938, designated Army Type 98 Single-engine Light Bomber, Kawasaki manufactured 854 Ki-32s before production ceased in May 1940.