Yes, Absolute handles Japanese in the terminal well. The things you have to consider to make this work (for those who don't know) are the LANG variable on the host, and the font and translation settings in Absolute (options->properties->appearance).
For SFTP, it's a bit different. AbsoluteTelnet supports SFTP version 4, which (among other things) allows the host to tell the client whether the filename is in UTF8 format or not. So, if Absolute is talking to a host that also supports SFTP version 4, the filenames should appear correctly. However man popular SFTP server software (OpenSSH included) only support SFTP version 3, which does not allow the SFTP host to tell AbsoluteTelnet the filename encoding. This leaves AbsoluteTelnet to *guess* (sometimes badly) at what encoding to use.
I'll look into this further. It might be reasonable to default the translation to match the one being used in the terminal. This may work in your environment, but may not be the right solution for everyone. It might also be reasonable to allow the user to explicitly select the filename character set when the host is using SFTP version 3 or below.
Are you using OpenSSH on the server?
There is an OpenSSH bug for this as well.
https://bugzilla.mindrot.org/show_bug.cgi?id=1068
More to come........