There's an interesting aspect to pachinko that says a lot about Japanese culture, and certain things that are illegal, but accepted.
Pachinko for money is actually illegal. You are not allowed to cash in your pachinko balls for money. However, they will trade you for little trinkets (pens, disposable lighters, little plastic things) that come in suspicious denominations, like 10,000 and 5,000. Then, there's a theoretically separate store, which usually consists of a tiny little window, where you can trade the trinkets for cash. This, for some reason, is legal. There's a haze of illegality over it all, and most pachinko parlors are probably in cahoots with the Yakuza, to a certain extent.
Pachinko-gambling is theoretically illegal, but everyone knows it happens, and its accepted. I thought prostitution was illegal in Japan, but there's many suspicious activities in certain parts, at least that's what I remember.
I was born there, but I grew up in Los Angeles.
More detailed description of modern Pachinko
In the olden days, Pachinko machines were simple. Originally, the plunger was activated by a level that you'd pull back with your thumb. This meant the number of balls you can put into play was dependent on your skill. As ball rate only determines the amount of money you can stick in the machine, this did not help the Pachinko parlors. So they switched sometime in the early 80's to an electronic plunger system, with a large plastic spring-loaded dial. If you turned the dial, the balls kept shooting at a high rate. The strength of the launch could be adjusted with the dial. People eventually took to jamming the dial at a set location with a 10-yen coin. Perhaps it was theoretically illegal to play this way, as it would turn a theoretical game of skill in to a game of luck...
Old Pachinko machines were simpler than the current model. The basic hole where you get 5 balls back if you get one ball in are still found in some machines. The next level of complexity is the "Tulip"-style hole. This hole has wings on the side that start out in the upright "closed" position, leaving a ball-sized slot. Though it's unlikely for a ball to get into this slot, after the first ball goes in, the wings (or Tulip petals) open up, making it much, much likelier. The current machines basically have this kind of setting in the middle somewhere, where it's reasonably hard to get to. The main features of modern Pachinko machines, however, is the "slot machine" mechanism. There is a fairly difficult hole, usually somewhere in the center. Each ball that gets in the center triggers the mechanical or electrical slot machine. If a minor prize lights up, some flap opens up in the center for a short time, paying out fairly well for each ball that ends up in the flap. The flap is usually large enough so that this small prize is worth many, many balls. However, if a major jackpot hits, a cycle of flap openings and slotmachine-spinning begins. There's a set chance of this "fever" mode to repeat, going as many as 20 times. This is what the modern Pachinko junkie craves for. This is the big payoff, and each single fever is usually good for at least one large tub of Pachinko balls. This usually translates to something over 10,000 yen (or around $60 I think). Multiple "fever" sessions can easily rack into serious money.
This has led to Pachinko being not much more than glorified slot machines, if you know what you are doing. Pachinko "Pros" can determine which machines are likely to give good odds of getting you "slot machine" spins, and can adjust the dial to give the best chance of getting the ball into the "slot machine" initiator hole. So at best, Pachinko is a slot machine, at worst, it's a slot machine you have to throw your money at from 10 feet away, and you can't pick up the money that misses the slot. At least the air conditioning is good in Pachinko parlors, though the piped-in music and constant noises of OTHER people in fever-mode gets quickly annoying.
There are a handful of Pachinko machine manufacturers, and new models are introduced every few months to keep things fresh. Certain machines get a reputation for good payouts, so older machines can be found at certain parlors. Ultimately, however, each parlor can alter the odds by careful positioning of the pins that make the balls bounce around. The odds involved in the mechanical or electronic slot machine thing is unalterable, and may be governed by law.