Either that's one serious bug, or Microsoft decided the cost of the QA wouldn't be worth it for a game that already faced two strikes -- being a downloadable game in Japan, and being an Xbox 360 game in Japan.
The Torchlight avatar cap and other accessories are still available.
Update: Runic president Travis Baldree sent the following statement over to Joystiq:
"We're not privy to the decision making process in providing the game in Japan - but it was not due to bugs in the translation because the game has never been translated to Japanese. Since there was no existing Japanese version of the game, the complexity of a new translation combined with the randomly generated naming scheme for Torchlight made it beyond the scope of the project."In other words, this is much weirder than just a bug that killed the whole project -- the Japanese version never existed, and the "cancellation" announcement came on the projected release date.
Update 2: And Microsoft has sent along the following: " "We made the decision to not launch "Torchlight" on Xbox LIVE Arcade in Japan due to localization complexities; not due to bugs. We apologize for any inconvenience."