In addition to some of the more conventional festivals like Tanabata, which is huge in Sendai by the way, there are gems out there like the fertility festival held at an actual shrine out near Nagoya (apparently many affectionately refer to it as the "penis shrine", and with good reason), and my favorite, the naked man festival.
See, this last festival, held in the dead of winter, has you dressing up in one of the sumo diaper-looking things you see above - as an aside, if that guy was holding me up I'd cry too, then pee all over his diaper. So yeah, 1,000s of half-naked guys in the freezing cold, and they make you walk through a shallow yet frigid stream, then fight for a small bale of sticks in the maelstrom of nudity coagulating in a massive moshpit/scrum-like gathering at the base of a shrine. Traditionally, the person who brings a stick back to the door of the shrine is supposed to have a fruitful and productive year, but more recently, the one I heard of puts a gold stick in there as well that also comes with a cash prize. For this reason, I hear that some yaks try to enter, and will seriously mess you up if they find you with "their" gold stick. This in turn leads them to disallow anyone trying to enter with visible tattoos, but unless you have one of those full-back murals the old school yaks like then you can patch it up and squeeze through from what I heard.
Man, I gotta check some of these out some time! ;P The best stuff I've been to thus far was the snow festival up in Sapporo and the Streetjazz festival in Sendai, which is like on a totally different scale.