You should be able to enter characters using the IME, because LFS fully supports the IME.
But there is one thing you need to make sure of.
In Windows XP :
Control Panel...
Regional and Language Options...
Advanced...
"Select a language to match the language version of the non-Unicode programs you want to use:"
There you must select the input language you want to use with the IME (Japanese).
I think you have to restart the computer after that, but the IME should then work correctly - LFS displays candidate lists and is supposed to give you full support. Please let me know if it works well.