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Complete annexation should be a rare case. Japan may well decide to annex part of China and keep other parts as puppets. You must have caught a couple of unlikely rolls of the dice.
If you annex you will have:
# major unrest and partisans to deal with
# Only a small increase in overall I/C which is reduced further by the unrest
If you have puppets you gain free garrisons units (and sometimes a few air units from the KMT)
You also get enough units from your puppets to use in the initial phase of the war vs India and Malaya. (supply becomes a real issue for them however)
I think puppets will also give you free resources as well.