You're in luck as i just came back a couple days ago from there.
We started off in Tokyo and went all the way down to Fukuoka and caught the ferry to South Korea from there.
Hostels. definately the way to go. Although i did not find them as much 'friendly' as i have in other countries. Japan is not really a place where a lot of young people go, as compared to Europe or Oz. Mostly due to how expensive it is.But hostels definatly cheaper then hotels.
Rail Pass - i would say DO NOT get it. Its super expense. I think for a week it was like +-$450. If you catch buses, although they take longer, are 1/3 of price of trains. For example we caught an overnight bus (fairly luxury compared to buses anywhere else in the world) from Tokyo to Osaka and it was 4000 Yen, (Train was 13000).
English - youre fine in major tourist places. if you go somewhere off the beaten path, very little english (this can be said for majority of places though), but i was fairly surprised of how little they actually speak English.
I was not a very big fan of Tokyo. You gotta see it and all, but just seemed it was lacking a little soul. Day trips to consider would be Nikko (as far as temples go, my favourite place in Japan), and going to Mr. Fuji.
Kyoto is really the cultural centre of the country with Temples and shrines everywhere you look. Out of anywhere, spend most time here.
Osaka is the 'urban culture' capital of the coutry. Loved it here. lots of expats living here also.
Hiroshima was cool, but besied the H-bomb museum, not much else impressed me there. Although like the previous poster said Myiajima is great (although after looking at shrines/temples for 2 weeks you might have enough of that).
Turned out not as expensive as we thougth. Tokyo was really expensive, others a little less. Accomodation is the worse. Food is cheap. You can get good healthy meals for $5 (outside of Tokyo).
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