[JTM]

I think it might be illegal and is basically an underground thing:

Japanese Used Underwear

JapanProbe does claim however that there are small stores in Akihaba(ra) that sell them:

Buying Used Panties in Akihabara | Japan Probe

Many also refer to an article at "Snopes" that says that the practice is still going on but is based on third-party accounts:

snopes.com: The Love Machine

Japan's Used Panty Vending Machines: Fact or Fiction?

I think that there was a recent arrest made from a client that tried to buy panties off of a under-aged girl:

First man arrested for buying the panties off of a 14-year-old girl | Japanator.com: anime news, original features, and weird stories from Japan, updated daily!