The G-Word

In the comment threads two posts ago, I used the word "gaijin" (lit. outside person; outsider, foreigner) as opposed to "gaikokujin" (lit. outside country person; foreign national, foreigner), and a fellow IESer chewed me out for that, asking me (politely, if somewhat condescendingly) to stop using the word. I'm not sure I have an informed opinion on the subject, so I'll just open the floor to discussion.

So, "gaijin": When is it acceptable for foreigners to use the word referring to themselves? What about referring to other foreigners? Does it make a difference if they're expats as opposed to those staying more temporarily? Is it acceptable for Japanese people to use it ever? In what contexts is it pejorative? Is using the word "culturally insensitive"? Is it equivalent to "nigger" (and therefore deserving to meet the business end of the PC ban-hammer), or is that an overreaction? Is it better for racist epithets to be co-opted or excluded by the group that they refer to?

Food for thought:

• Wikipedia entry on Gaijin
• Essay arguing that "Gaijin" is a Racist Word
• Blog entry on Racism in Japan with some interesting discussion in the comment threads

Update: I asked my host mom 外人と話すのは失礼ですか (gaijin-to hanasu-no-wa shitsurei desu-ka; "is it rude to say 'gaijin'?" [although "hanasu" is probably not quite the right verb, among other problems]), and her response was that it wasn't, although she noted that the word makes some older Japanese people uncomfortable (that's heavily paraphrased, though... I may have missed some of the details of her explanation).

Update 2: The above is totally wrong (wrong verb, can be misinterpreted as "is it rude to talk to outsiders". The correct phrase is apparently 外人の言葉は失礼ですか (gaijin-no kotoba-wa shitsurei desu-ka; "is the word 'gaijin' rude"). According to Kyoko-san (again heavily paraphrased) the word is impolite because it seems to imply that there is some fundamental difference between "nihonjin" and "gaijin" (Japanese people and all other people).