Notice it says To not From wounded units? So wounded Japanese units would only do 125% damage if they are attacking an enemy unit that is also wounded.
The point of this policy is to finish off wounded units easier.
Example: Your first unit attacks an enemy for 5 damage and takes it down to 5/10 health. Without this policy, your 2nd unit only does 4 additional damage, taking it to 1/10 health. Now you need a 3rd unit to kill it. With the policy, that 2nd unit would have done 125% damage or 5 points instead of 4, thus finishing it off right then and there.