The fall of France to Germany in 1940 suddenly changed the political landscape. The Japanese occupied Laos, and Siam, renamed Thailand in 1939, seized the west-bank territories of Xainyabouli and Champasak. In April 1945, the Japanese forced Sisavang Vong, the pro-French Lao king, to declare independence. Phetsarath became prime minister and an independent-minded Lao elite formed a government which became known as the Lao Issara , literally "Free Laos". Phetsarath wanted the Kingdom of Louang Phabang and the territory of Champasak to be a single, independent Kingdom of Laos, and King Sisavang Vong was deposed.

The Potsdam Agreement , which marked the end of World War II, failed to recognize the Lao Issara government. In March 1946, French reoccupation forces, along with their Lao allies, recaptured Vientiane and Louang Phabang. Thousands of Lao Issara supporters fled to Thailand, where Phetsarath established a government-in-exile in Bangkok, as the French reasserted their control over Laos.