Cyclic deformation at low-stress amplitudes of a rare earth-containing magnesium alloy (Mg–Gd–Y–Zr) was investigated with emphasis on the responsible microstructural relationship between deformation mechanism and fatigue crack initiation. The results show that the microstructural deformation is extremely inhomogeneous at the low-stress amplitudes. Both deformation twinning and non-basal slip are barely observed, and basal slip is the predominant deformation to accommodate micro-plasticity. Fatigue crack initiation occurred at the basal slip bands, causing the morphology of facet on the fracture surface. Therefore, the basal slip is of prime importance in low-stress cyclic deformation and fatigue failure, and fatigue improvement could potentially be obtained through hindering the motion of basal dislocation by microstructural obstacles.