Personally, I tend to use japanese for a proper names, a small sprinkle of terms and phrases, and nothing else. I will use the Japanese name for any character, but I will use western name order for japanese characters versus eastern name order for those from china to differentiate the two cultures.
I.e Ranma Saotome v.s Song Zhu Shu
beyond that, I will note in story that a character has USED a japanese word, but rarely do I put it in text. Overuse of familial names such as the japanese for father, mother, sister,etc. is rather pointless, and disrupts the flow.
I will also use the Chinese equivallent of such names as Ke Lun, Shan Pu, Lo Shen, etc and use the slurred forms for those Japanese who would hear it slightly different. (Kodachi calls Mu Si, Mousse for example.)
It depends entirely on what kind of story you want. do you want one that reads well, or is japanese centric? I find the more japanese, the less smoothly it reads.
Val