My Japanese is not yet good enough to read what's on the flag. But good enough to transcribe it some of it, a rather difficult google hunt later I've discovered what it is you have:

It is a hinomaru yosegaki, or good luck flag. It has a whole wikipedia article here: http://en.wikipedia.org/wiki/Good_Luck_Flag

The Good Luck Flag, known as hinomaru yosegaki (日の丸寄せ書き?) in the Japanese language, was a traditional gift for Japanese servicemen deployed during the military campaigns of the Empire of Japan, though most notably during World War II. The flag given to a soldier was a national flag signed by friends and family, often with short messages wishing the soldier victory, safety, and good luck.

My google hunt showed me that there are Chinese forgeries of these flags going around, but from what I can tell yours is definitely real. They were quite common, but since you mentioned connecting it to someone for whom it holds greater significance I'll quote this part of the wiki article above:

Effort to Return Flags To Japanese Families

OBON 2015 is a 501(c)3 non-profit affiliate organization with the mission to return all of the good luck flags to their families in Japan by August 2015, which marks the 70th anniversary of the end of the war.[5][6] The American Embassy in Tokyo wrote a letter to OBON 2015 declaring; "OBON 2015 continues President Kennedy's spirit of reconciliation and friendship." [7] As of December 2014 they have returned 16 flags and have more than 50 other flags they are currently working on returning.[8] Published news stories and interviews indicate that the effort to return the flags is seen as a humanitarian act which can provide closure for the family members.

Not much more I can tell you. If you want to have a better translation this site which I came through in my google hunt has people translating these flags, amongst other things, so you can try there or seek out the organisations linked on wikipedia. As I said my Japanese isn't that great yet, but hopefully the above is enough for you to pursue if you do decide to do more with it.