Firstly, let's tackle some common myths:

There seem to be done rumors that your parent's have to have to be Japanese in order for you to gain citizenship.  That is false.  It is true that is either of your parents is Japanese at the time of your birth, you automatically become a Japanese citizenship.  However, it is also true that anyone who meets the other requirements can apply, regardless of their parent's citizenship, ancestry, or resident country.

Another misconception is that you have to be born in Japan to become a citizen.  That is also false.  In fact, quite the opposite - being born within the borders of Japan doesn't give you any special rights. The only time when being born in Japan gives you any claim on citizenship whatsoever is when your parents are unknown or stateless (have no citizenship).  This means that a pregnant mother can't simply take a trip to Japan to have a baby in Japan and expect it to have Japanese citizenship - it won't.

You have to be able to read, write and speak perfect native Japanese to become a citizen.  You must pass a Japanese test as part of the application process.  While there is no official legal requirement to know Japanese at all, there is certainly a practical requirement in order to make it through the process.  Also, the unofficial guideline is that you should know Japanese at roughly a third grade level or better in order to be able to live normally in Japan.  On the other hand, if you have passed any Japanese tests such as the Japanese Language Proficiency Test, you should certainly submit them as additional evidence for your application as they can only help.

Many people think that you must take a Japanese name.  This is not true in the sense that most people think, as there is no such thing as a "Japanese Name" in the legal sense.  Nobody will force you to become Tanaka Jiro or Nakamura Yukiko.  You can choose whatever name you like, even if it is "David Smith" or "Yuna Choi" - you will have to write it in Katakana in some places though.  For Kanji names, there are limitations on the Kanji you can use when registering a name, which means if you have a Chinese or Korean name you want to use as-is, you might have to use a slightly different version of the character, etc.

You must have have permanent residence before you can apply for citizenship.  This is also untrue.  In fact, in many ways permanent residence is more difficult to obtain than citizenship.  At any rate, the application process is totally different. 

You must pass a Citizenship Test before you can become a citizen.  Some countries, such as the United States, have written tests which include topics such as government and history.  Japan has no such test.  The application process itself is enough of a test!