This paper discusses the conflict between language policy and actual practice regarding loanword use in Japan. Localized appropriation of foreign words is nothing new to Japanese history; nevertheless, the Japanese government deems the current influx of loanwords to be “problematic”. A 2007 report by the National Institute for Japanese Language (NIJLA), commissioned by the government, finds that numerous loanwords that appear in public discourse are not understood by the average Japanese person. NIJLA suggested that the most commonly non-understood foreign-language loanwords should be replaced with native Japanese or Sino-Japanese paraphrases instead. Despite the fact that it is the government that first “problematized” this situation, and one of its own institutions that has suggested the countermeasure, a comparative examination of loanword use in public resources reveals that it is primarily government administrators who introduce new loanwords, legitimize them, and treat them as established discourse. It is argued that this apparent discrepancy is a conflict between two different forms of language ideology – NIJLA’s (as well as the government’s) essentialist notion of ‘democratic language’ versus actual language use, including the very ‘third space’ language practices of government officials that have arisen within the contexts of the transnational discourse of globalization and internationalism.