I don't think anyone can really answer why the Japanese prefer stylized graphics. But they've been consistently at the forefront of international design trends for a number of decades now, so I think it's safe to say that the Japanese simply have a more "refined" aesthetic then other nationalities.
As for the lack of military presence being an excuse for FPS unpopularity in Japan... The only reason Japan doesn't have a military is because it was forceably taken away from them because they were far too militant. I think that FPS unpopularity is more due to the lack of Japanese sense of individuality. This would also explain why RPG/strategy games are more popular in Japan then they are in the west. They still like their bloodshed and violence (further explaining the unpopularity of sports games in Japan), but they're more at ease when it's done as part of a group situation, not when they're the single, solitary soldier slaughtering everything else on the field.
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