McDonnell had held the title since May 2014 but the Yorkshire fighter was blown away by Inoue, who becomes a three-weight world champion in just his 16th fight.
The bout started off tentatively with McDonnell looking to establish some distance between himself and Inoue, but once the home fighter landed his first flurry of punches, McDonnell looked in trouble.
Two bludgeoning left hooks led to McDonnell hitting the canvas after just 88 seconds and although the 32-year-old got to his feet, it was inevitable that the bout would reach a quick conclusion.
Once Inoue had McDonnell against the ropes, he connected with a thudding right hand and just a few punches later, McDonnell went down again and the referee waved off the fight after just 111 seconds.
McDonnell will now almost certainly move up to super-bantamweight after appearing to be drained at Thursday's weigh-in, while Inoue is expected to defend his belt in the WBSS tournament in this division, which will begin in September.