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Manchukuo was the name of the Japanese puppet state/colony that was established in the Chinese region of Manchuria in 1932.

In the Russo-Japanese war of 1904-5, Japan managed to obtain all the the Russian rights over the region of Manchuria, as part of the peace settlement. Russia at that time had occupied Manchuria (very illegally), taking advantage of the waning of the Qin dynasty. The war ended with the Russian revolution causing Russia to withdraw from external politics for a while. Most of the land battles in this struggle took place on (nominally) Chinese lands.

China was unstable politically from 1911 onwards, when the Nationalist revolution took hold, and many provincial authorities sided either with the Kuomingtang, the National Party, or regional warlords and last remaining imperialists. The Kuomingtang was mostly successful in its bid to unify China (albeit briefly) in 1919, when the Kuomingtang was formally declared.

Seeing this, Japan presented China with a list of 21 demands, to which all were agreed. Included in this list of demands were the right to base the Japanese Kwangtung army in Manchuria.

In the course of politics, Zhang Zhou-Ling, the regional commander of the provincial armies of Imperial China, who had previously sided with Sun yat-sen and the Nationalists, was forced to return to Manchuria. The Japanese had hoped to install Zhang as the ruler of Manchuria, but it seems that the Japanese Kwangtung army tried to assassinate him. The Kuomingtang reacted, and began propagating Nationalism in Northern China.

Because of this fervor, the Japanese embassy at Nanjing was attacked in 1927. General Tanaka came to power on the back of the resulting anti-Chinese sentiment. The Japanese Kwangtung army staged an explosion at Shenyang (called Mukden in Manchurian), and under this pretext, occupied all of Manchuria. The Nationalist forces, for unknown reasons, had been ordered not to resist the Japanese advance. This is known as the Manchurian Incident

The Kuomingtang asked the League of Nations to intervene, and despite some arguments, none of the members of the League deigned to intervene directly. The US decided to not intervene, and not recognise the resulting state of Manchukuo. Shanghai and several other cities refuse Japanese goods.

The state was established under Japanese sponsorship on March 1, with Henry Pu-yi, the Last Emperor of the Qin dynasty as its ruler. The Qin dynasty was Manchurian, and the establishment of a Qin dynasty emperor as the ruler of Manchukuo helped Japan pacify local sentiment. The Manchurian capital was moved from Shenyang (Mukden) to Xinjing (New Capital, previously the city of Changchun). The Japan-Manchukuo protocol was signed in Sept. 1, and allowed the stationing of Japanese troops in Manchukuo, and the recognising of all previous "agreements" made upon China.

Manchukuo, in an effort to establish its legitimacy, had its own national anthem, stamps, coinage, schooling system, etc. Japanese investment flowed into the region, and for a while it became the most economically advanced area of China, and was the site of the most advanced railway service in the region.

In 1933, Manchukuo applied to entry into the League of Nations, but was denied, because of doubts over its lack of sovereignity.

Even after the start of Japanese entry into the Second World War, Japan recognised Manchukuo, though I do not personally know whether the Emperor Pu-yi actually remained. This fiction was ended after the surrendur of Japan.

During the war, Japan drew heavily upon Manchukuo for natural resources and money to fund the war effort, as evidenced by gold ingots stamped with the character "man".


References
Compton's Encyclopaedia - Manchuria
The Japan-Manchukuo Protocol

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