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Development began following the commercial success of Fire Emblem: Shadow Dragon and the Blade of Light in 1990. The original game's designer and writer Shouzou Kaga returned to those roles and also became director. In addition to Kaga, Gunpei Yokoi returned from Shadow Dragon and the Blade of Light as the game's producer, while the visuals were created by Naotaka Ohonishi, Satoshi Machida and Toshitaka Muramatsu. The music and sound design was handled by Yuka Tsujiyoko, who had worked on the first Fire Emblem.

Kaga designed Gaiden to address issues raised with the first game, such as tedious elements of map navigation. The system of Shadow Dragon and the Blade of Light was used as base for various improvements to aspects such as enemy AI, although the gameplay adjustments ended up removing some of the strategic elements. These elements included a navigable overworld and more overt role-playing elements, along with the introduction of the class evolution system. Balancing these elements proved challenging for the team. The game made use of the new MMC4 memory chip, developed partially in response to the memory capacity problems faced during the development of the first game. For the story, Kaga wanted to deepen the relationship between the player and their units, represented through the growth of the characters through their battles. To create a stronger and broader central narrative, Kaga created the game's dual protagonists.