Plenty of literature recognizes the more accurate names of "Nippon" or "Nihon" for what most English-speakers call "Japan". Some authors never refer to it as "Japan" or it's people as "Japanese" (among them William Gibson and Neal Stephenson come to mind). Mostly it's "Nipponese" with those authors, but they are few, and most English writers call the nation "Japan."
From what I understand, we call if Japan because of the Mandarin Chinese pronunciation of the kanji. The Portuguese recorded the term from the Chinese as "Sipangu" or "Zipangu" if I remember correctly, and it made its way into English from there.
I, for one, would prefer to go around saying "Nippon" and "Nipponese", but most people would either not understand or take a moment to figure it out.