This Information is from Japan-Guide (click to visit their website)
Pachinko is a mixture between slot machine and pinball. The player is quite passive while playing pachinko. He or she is only controlling the speed with which the many small steel balls are thrown into the pachinko machine.

Most of the balls are just falling down the machine and disappear, but a few find their way into special holes. This activates a kind of slot machine. As in the slot machine, you win if the same three pictures appear. This occurs quite rarely in pachinko, but if it happens, you win countless new balls. When just playing for 500 or 1000 Yen, you may most likely just see all the balls disappear within a few minutes.

Pachinko machines can be found in pachinko parlors which are spread over the whole country. Many parlors also offer a corner with slot machines. One can recognize parlors easily because they are bright and colorful. Inside a parlor it is loud and smoky. Women and men are playing pachinko and it is said that there are even a few pachinko professionals.

If you win balls, you can exchange them into goods that are available in the parlor's gift shop. But you can also bypass the law that prohibits gambling in Japan by exchanging the balls first into some special goods and then exchange them for cash at a small window just outside the parlor.
Pachinko's big secret This secret is really not a secret because everyone in Japan knows it. Let me explain. It is illegal to gamble in Japan. But, everyone knows that pachinko is played for money. So, how come pachinko is allowed? Inside the pachinko parlor, the balls that you have won are brought to the "ball exchange area" and exchanged for some trivial prize (perfumes, coins etc.). Even though there are other prizes, no one ever takes them. This is the secret. You take the trivial prize that you have won, and leave the parlor. Somewhere nearby the parlor there is an "exchange place". It is normally in an alley. The type of dark, narrow alley you might imagine. The exchange place is normally just a window in the wall. Your face can not be seen by the person in the window. Just push your prizes into the window and they will be exchanged for cold hard cash.