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A new perspective of damage‐induced shear strain localization is proposed to elucidate the formation mechanism of fine granular area (FGA) generated in a high‐strength steel under very‐high‐cycle fatigue (VHCF). The development of local shear strain, effective resolved shear stress, and damage evolution at the vicinity of an inclusion has been predicted by crystal plasticity finite element method (CPFEM) coupled with damage at stress ratios of R = −1, 0.1, and 0.5. The microstructure of FGA is characterized by using scanning electron microscopy, transmission electron microscopy, and transmission Kikuchi diffraction. The experimental results show that the FGA consists of high‐density dislocations, subgrains, and fine grains with high‐angle grain boundaries. The simulation results find that the negative local effective stress ratio is compulsory to FGA formation in VHCF. Finally, the tendency of decreasing FGA formation with increasing global stress ratio is explained, and the conventional FGA formation mechanism is extended.