It's not as bad as that. Indeed vaginal and anal penetration as commercial service is illegal, but BJ bars are common place, hand-job is standard practice, sumata (crotch rubbing) can also be satisfactory sexual service. In Western country, you can easily paid for a vaginal penetration that's still unsatisfactory considering the overall experience.
And then in-the-room deal is also common practice, and Japanese police don't make it a religious duty to eliminate full sex for paid. Put it plainly, police is taking a sanguine view of legal gray area transaction.
I think nowadays, even "foreigner" itself isn't a deal-kill. The real barrier is navigating the legal gray area. If a foreigner can learn the navigation like the locals, I think he has decent chance to get the same treatment as locals. The problem for you and I is that we don't have the time/money/patience to learn enough Japanese and learn the channels and mannerisms and all that investment before getting the commercial sex.
So are these Japanese ladies who provide rubbing only, prostitutes?
...Cos the fact is that there is no actual vaginal penetration.
Look inside my own head I agree with you, actually my morality standard is that safe sex is not sex. In my definition, sex is only sex if there's exchange of bodily fluid.
But that view is meaningless in any open forum. You pay a girl for some service, which is mutually understood to be completed when you ejaculate. Whether it happens in a condom in her mouth, or hands, or vagina, it's a sexual service. And she is a prostitute. If you would only be satisfied with vaginal penetration, that's your prerogative. I know a friend who wouldn't get a erection for any girl over 100 lbs, doesn't mean he can redefine the word prostitute based on fats.