This practice has produced an entire lost generation called “Hikkikomori,” Japanese people who were excluded from Japanese society so completely that they don’t even leave their homes. Some of them are entirely dependent on their aging parents for their subsistence, including shelter and food.
That says nothing of gay people, whose presence is tolerated at best.
When it comes to foreigners, they are welcomed as tourists and guest workers, but there will always be places and aspects of society that they will never be welcome in.
This is exclusion for no other reason than xenophobia. Even a person who learns the language, practices the customs, pays taxes and follows the laws will not be accepted in Japan.
What you’re hitting at in your response is “The paradox of tolerance.” To arrive at the paradox of tolerance, a society has to have a sufficient level of tolerance. Japan simply doesn’t.
When I say this is “bad,” I mean this is in two ways. First, it violates my principles of tolerance for good faith actors — a set of values shared broadly in the west, to varying degrees and with a lot of asterisks. Secondly, it’s bad for Japan. In a situation where your demographics are decades into terminal decline, the ability to integrate foreigners is the only option to continue to being a going concern. The breakdown of their society without foreign integration will be catastrophic.