The first few times I played as Japan I had a difficult time fighting China. I would invade, make some easy gains along the coast, then STALL horribly while trying to get to the interior and end up in a WWI style battle line.
The last two times I played ad Japan, I worked out a good strategy to annex all of China by the summer of 38 (war starting in summer of 37 from Marco Polo incident).
Disband all brigades, except a few MP ones, MAYBE keep some of the engineer ones. On Day 2, with auto-promotion turned on, disband all the level 1 ships that are not BB, CV or CVL.
Trade with the US (and others) for $$$ so you can put your IC to more effective uses then consumer goods.
Send your transports out to gather in all your garrisons, and deposit them on the mainland. Transfer everything to the mainland. Keep 1 unit on Japan to shuttle newly produced brigades over to the mainland.
"listen to the demands" in the 2-2-6 incident. This is the best option long term.
Concentrate your IC on upgrading existing units. By the summer of 36 your upgrades will be complete and you can begin producing new units.
I start a 6 parallel run of 5 infantry and a 9 parallel run of 5-10 militia. I then organize my forces as 2 INF + 1 MIL for LT Generals and 2-3INF + 2-3MIL for Generals/FM's. This gives me all I really need to conquer China. Their production will be completed a month or so before the Marco Polo Bridge.
After that, I begin producing TAC, FTR and naval units.
For the war, similar to TheWretchedMass, I do planned encirclements, but I do only 3. The first in NE China, very similar to his.
The second, I make an amphibious landing in Shanghai, then push in and link up with the northern troops to encircle the eastern coastline.
I then push out my frontage to just past the rivers (like Wuchang). By this time its November and I sit tight for the winter. Making progress against the chinese in winter weather is not a winning proposition.
Once spring arrives, and the chinese troops are all nice and dug in, I make an amphibious landing on the coast near Hainan Island. I then ling up with my nothern forces and cut off the south east coast, then destroy. I am then easily able to move in towards Chengdu and fire the capitulation event.
Air power (like wonderful TAC), makes your job much easier. Concentrate the airpower around your battles. Interdiction to break them, then switch to ground attack to whittle them down. It requires a LOT of micromanagement (setting up the attack to commence 1 hour after the ground forces, then pausing and switching to ground attack, etc), but the results are well worth it. Micromanaged applied air power is devastating.
The problem I now have i once china has capitulated, and annexed, what do you do then? Its 38, and not much for you to do till 40/41...
P.S. If you are at war in 41, even if it is with Afghanistan, the US oil embargo will occur. So try to have some alternative sources for your trades setup by then.