Japanese banking regulations make it quite impossible for a
non-Japanese resident (ie, someone not living in Japan) to open a bank
account in Japan.

Japan domestic internet trades are settled mostly by bank (or postal)
wire from buyer to seller. In case the seller is a large corporation
(say, HMV Japan) then they usually accept credit cards as well.

This is altogether much more secure and much less costly than PayPal.
Therefore, PayPal use is about non-existent in Japan, or only in the
situation where the seller in Japan targets potential non-Japanese
buyers.

In particular, check the very efficient JAPAN NET BANK (JNB), which
allows internal wires between two accounts opened in their books, for
the FLAT FEE OF ¥52, whatever amount is wired (up to the usual ¥2M, i
suppose).

JNB won't allow non-residents to open an account, but took a large
share of online trades settlements in Japan. Moreover, it is a real
regulated bank, as opposed to PayPal's fuzzy nature (not a bank) and
screwy behavior (extremely user hostile TOS etc...).

I expect within a few years a group of major international banks (Chase
etc...) will build a system that allows cheap wires worldwide, and
PayPal will take a major hit in their business. In fact within the Euro
zone, it is already the case.

Very often even for an international transaction it is cheaper to send
an international money order than to use PayPal. There is a long list
of countries from which such Postal Money Orders may be sent to Japan,
electronically (it gets there in 3 days, totally secure). In a way, the
post offices united would be in position to dominate this type of
activity, as they are present everywhere on the globe and already in
business one with another for the mail.