Dathi,
From what I've read, the Japanese high command knew that they could not win an all out war against the US. Japan simply lacked the economic size, population, and access to raw materials to win such a way. Japan could however, make fighting such a war become so unpalatable that the US, being weak and decadent as were all Westerners, would tire of the endless slaughter and accept a negotiated peace.
The negotiated peace would leave Japan with uncontested control over China and as the recognized dominant power in that region. For this, the Japanese were willing to endure an absolute bloodbath when it came to grabbing all those otherwise worthless little bits of coral atolls that were barely above sea level at high tide. The real prize was China. So, the Japanese militarists figured that the loss of all those garrisons on all those Pacific Islands would be worth it if they wound up with China as being fully theirs after the peace treaty was signed.
The Japanese simply did not understand the implacable determination of the US to gain an Unconditional Surrender over Japan and that we would tolerate only an end to their imperialist desires.