The meaning of the word gaijin 外人
nakama igai no hito. soen no hito.
A person who is not a friend or of one's group. A distant person.
tekishi subeki hito.
A person who should be seen as hostile.
- 外国人。異人。opp.邦人。 gaikokujin. ijin. hantaigo houjin.
A foreign person. A person of another culture. opposite: <<person-from-speaker's-country>> (ie. if speaker is a Japanese person, this word means "Japanese".)
source: Koujien 5th ed. English "translation" arbitrarily assigned by me. (This is a CST Approved use of copyrighted material.)
It is easy to see why many literate gaijin resent the casual usage of this word. The ancient usage of this word is to mean an enemy or outsider, someone who does not belong. It is a reminder that one's appearance will always mean that one does not really belong, even if gotten used to. However, in my experience, this is still the default word of choice of Japanese, adults and children, housewives and TV stars alike. This label becomes very frustrating after one has lost one's gaijinity.
The proper word, gaikokujin, is generally only used on Japanese news (not to be confused with Japanese News-Like Variety Shows) or in formal situations. Even more polite phrases exist, such as gaikoku no kata. These are almost never used in conversation, perhaps because they are cumbersome to say.
When normal Japanese people make an effort to be polite in the presence of gaijin, they will often use the suffix -san: gaijin-san. -san is often used as a softener in Japanese; an example is okama-san, "Mr. Faggot". I have heard many a flustered Japanese use the pleonasm "gaijin no hito", (an addition made superfluous by the double use of "jin" and "hito", both the same Chinese character) in a vain attempt to make gaijin sound more correct. On the other hand, in places such as Roppongi where gaijin abound, it was at one point trendy to reverse the reading of the word as jingai, so as not to be understood by the gaijin.
Gaijin almost always use the word "gaijin" to refer to themselves and other gaijin, perhaps because that word best captures the bittersweet ironies of life in Japanese society. I've heard about African-Americans internally referring to themselves as nigger, and I think it's probably a very similar situation.
Why a white person is always gaijin, but a Korean, Chinese, or other Asian Person is not
It occurred to me while talking to a close Japanese friend that it's exactly the same reason that to me, a Canadian, an American would never be "a foreigner". Due to proximity and shared history, the label "American" outweighs "foreigner."
An Asian-American or -European may also be gaijin, especially when making a gaijin mistake such as wearing the wrong slippers, but is more likely to be categorized as a nikkei or haafu.
For occidentals, this label seems to be placed entirely on appearance, rather than behaviour. However, in my short two year history living in Japan, I (a caucasian and quite visibly non-Japanese) have been twice asked if I am Japanese. Compared to the amount of times I have been called "gaijin", this may be statistically insignificant, but both times were much more shocking than every shocked gaijin face combined.
James Clavell wrote several historical novels about gaijin, one of which is even named Gai-jin.
Sure, you may be a gaijin, but are you a card-carrying gaijin?