It is a universally held stereotype in the West that the Chinese and the Japanese cannot distinguish between the letters L and R. As for the Japanese, this stereotype does seem to hold true in my experience. When Douglas MacArthur was running as presidential candidate in the States, his Japanese supporters displayed a banner in the centre of Tokyo, reading "we play for MacArthur's erection".
When it comes to the Chinese, it is little realized that it is actually only the Chinese from the South who can't distinguish between L and R, since Southern dialects don't distinguish between the two. Southerners get the two sounds mixed up even when speaking standard Mandarin Chinese, which does distinguish between the L and the R (although the Chinese R is a bit different from ours, and the ability to produce a long rolled R can make the Chinese fall around with laughter.)
The Chinese from the South have much greater trouble pronouncing the sounds of standard Mandarin Chinese than do Northerners in general. This is unsurprising, since the language is based on the Beijing dialect, which is closer to other Northern dialects than to the Southern ones.
Another mix up which is not at all well known in the West, but which I find far more baffling than the inability to tell an L from an R, is the lack of distinction between the L and N sounds which one finds in many dialects of Southern China (although not in all of them).
When I traveled through Guizhou province, understanding the locals' Mandarin was made harder by their constant and unconscious substitution of N for L. Although I had never thought about it before coming to China, I suppose the two letters are pronounced similarly. I know lots of people in Beijing who come from Sichuan, Guizhou or Hunan, and they are still unable to tell the two sounds apart. If they know English they will make the same mistake in English, referring to a lecture as "necture" and Mr.Li as "Mr. Ni". Although some of them do make an effort to learn the difference between the two letters (which is after all marked in the Pinyin they learn in school), it still seems to take a conscious effort for them to remember which one is which. A bit like me with the second and third tones of Chinese.