Los Angeles. Summer 1997. There was this guy named Kevin in the office I worked at who was obsessed with the notion of panty vending machines. He even wrote a screenplay about them, complete with, as he explained, a scene at the panty vending machine factory. He said, "Dude, in Japan, they're on every corner."
My boss headed to Japan that summer to try to negotiate the rights to a Kinji Fukasaku gangster flick. But before my boss left, this guy wanted him to find out about these vending machines. When my boss got back, he brought back tales of hanging out with big time movie directors, delicious food, and new friends. But no underwear vending machines.
There's a fascination in the West with Japan's underwear vending machines, as they are a perfect storm of what foreigners think are Japan's obsessions: tech and sex. In Japan, the vast majority of vending machines can be divided into two categories: drinks and cigarettes. But the country has seen an array of vending machines over the years—from comic books to umbrellas. Some of the most interesting vending machines have sold neckties, milk, noodles, batteries, and even canned bread. Vending machines that sell alcohol are harder and harder to find (they still exist, though!).
From the late 60s to throughout the 80s, vending machines popped up all over the place. They were supposed to offer convenience and easy shopping, especially in rural areas. Those specializing in adult goods figured that they'd be good for business, too, because they offer a degree of privacy and anonymity. This same rationale is why quasi-legal drugs have recently been sold via vending machines. It's also why you could, until around 2002 at least, purchase magic mushrooms via vending machines—they were made illegal around the time of the 2002 World Cup—in love hotels. (At the time, the rumor was that these drugs were made illegal over concerns about foreign soccer fans getting high.)
Since you could get, well, a wide variety goods via vending machine, it seems to make sense that someone, somewhere in Japan, would decide to offer underpants—used underpants. During the 1990s, there was a cottage industry, with some teens cashing in on the schoolgirl craze and selling their "worn" skivvies. So, yes, someone somewhere in Japan would put those in vending machines, too. But that wasn't the main way used panties were sold—they were sold in a certain type of adult store—and it apparently wasn't widespread. This used clothing trade, however, soon came under scrutiny for obvious reasons, and a group of used underwear sellers were busted in 1993 for selling schoolgirl underpants; they were nailed for violating the country's child welfare and second-hand seller laws. Today, this type of business is thankfully illegal.
Of course, it's still totally legal to sell new underpants via vending machines, which is how you'd actually see these sorts of vending machines in Japan—if you actually saw one (website Gakuranman spotted one a few years back as did this Japanese site; Blog of the Hawk saw one at a hot springs resort that was for people who needed clean underpants.)
Still, the vast majority of Japanese people have no clue about them because the vast majority of people have never seen one. They weren't exactly out in the open. There weren't many of them. And the ones that existed were often in old, sketchy vending machines in super sketchy places. More importantly, most people are just not interested in buying underpants from a vending machine. So if you knew about them, that probably said more about the places you frequented or the things you are interested than Japan. They were real, yes, but were a blip on Japan's subculture radar and more of an urban legend than anything else. They have seen been blown out of proportion, fetishized by foreigners, and turned into a caricature—much like a Hollywood movie.