It is largely a result of tax policy and construction methods between 1960-1990 where it made sense to gut apartments after they depreciated for tax purposes.

In Japan, property tax decreases to zero over time, but resets if you upgrade it. There for people gut and remodel before selling their units so they get the benefit of a higher price, but the buyer pays the taxes.

But then you should compare home size to something comparable, like Tokyo to New York city, not Tokyo to USA.

"Why doesn't American real-estate behave like an exaggerated example of Japanese real-estate?"

The answer is of course that there are significant differences between the two groups being compared.