Sheltered bay
Hono is a bay or harbour and lulu is calm or sheltered. The name is a plain description of a deep, protected anchorage — the only one of its kind on the island, formed by a break in the reef cut by a stream.
That single geographic fact is why the capital is where it is. Before Western ships arrived the political centre of the islands was elsewhere; the harbour moved it.
The older name
The area was also called Kou, after a chief or after the kou tree, and older accounts use that name for the district around the harbour. Honolulu displaced it over the nineteenth century as the port grew.