from sci.lang.japan FAQ -
Where does the name Japan come from?
The origin of this word is mysterious. Some people say that `Chipangu' used by Marco Polo is not the origin of `Japan'. It is said that "Japan" came from Malaysian `Jih-pun' or something similar, which came from the southern Chinese dialect reading of
`Nippon'. Others say that when Marco Polo visited China, Chinese pronunciation was close enough to modern Mandarin that the character for "day/sun" was a retroflex fricative, something like the "Z" in "Zaza Gabor," or "j" and "r" pronounced simultaneously and held for a syllable. The character for "origin/root/bookscroll" was read something like "pun" (as in modern Mandarin, though it sounds more like the English word "bun" to English speakers), so Marco Polo did the best he could in Italian with what sounded to him like "jrjrrrpun". The weakest part of this account is the attribution to M. Polo; perhaps it was somebody who came along later?
Edited from a post by Bart Mathias.