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The small store phenomenon may be primarily due to the obscene cost of real estate. However, historically Japan has always had lots of small stores. (There are large department stores and other stores there too, of course)
The small stores you see in rows on the street are generally family owned, and they don't have a lot of excess goods to store. In the past, the first floor would be a store and the second floor would be the family's house. This is changing today however.
Each store is generally not selling so much that they have problems with lines clogging up their small stores. The stores are pretty congested though -- there isn't much space between shelves.
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