If you are, for example, mounting the flag in a frame, or if you want to post pictures of it on social media, you will want to orient it like I have in my post above. Often people who don't speak Japanese will put it upside-down, or back-to-front. In other words, they don't know that the flag has a proper direction vis-a-vis the writing on it.
Flags like these were presented to young men as they joined the army, or if they were sent off to the front lines. Usually they were presented by coworkers, colleagues, friends, fellow classmates, etc... The recipient's name is often written in large letters down one side of the flag, and the people who presented the flag would write their organization's name next to the recipient's name. So it isn't unusual to see a flag with large letters that say something like, "To Mr. Sato, from all of us at Tanaka Electronics". Then the fellow coworkers and friends would all sign the flag with their own individual names. It would be carried off to the front lines in the soldier's kit as a remembrance.
How your grandfather came into possession of it will be something of a mystery, I'm afraid. It is possible he took it off a Japanese soldier. It is possible he bought it off a Japanese soldier after the war, as the value of these items as souvenirs was instantly recognized after the war. If he was stationed in the Philippines for a while, he might have bought it off of a fellow US soldier. In fact, they became such sought-after souvenirs that many GIs started making their own fake flags to sell to other soldiers, and we see a lot of fake flags here on JREF. Your flag looks authentic. If you were considering repatriating the flag (trying to find the descendants of the soldier mentioned in the flag), there are organization that can help. The
Obon Society is one. The Japanese Embassy is another.