For Japan that would be a merger with Korea, Vietnam, Thailand, Malaysia or (probably) New Zealand. That sounds like a Western Pacific Conference to me :).
In general I would support this, it can be pretty boring to play in a micro-nation. The players in Japan are mostly foreigners who work and live here, I don't think that will hurt any national pride. However if, personally I would go for option Nr. 2, keeping the flag to be able at least represent the nation I live in.
Cheers