About as ready as it was possible to be.

There were very few places that the Allies (primarily the US) could invade and still be within comfortable range of Okinawa, the staging base for any invasion, AND have appropriate terrain for such a landing.

Because of this, it was relatively simple to figure out exactly where the invasion would be heading. Kyushu, the southermost of the home islands, would be hit in November 1945, and only the "bottom third" of the island taken. A number of major airbases would be built to support the invasion of the Kanto Plain around Tokyo in March of 1946.

While Japan didn't know exactly when the attack would come, they'd been moving troops to Kyushu for some time, and as the US came closer and closer, moved more and more troops and aircraft into position for the defensive of Kyushu, called Operation Ketsugo.

These were given plenty of time to dig into the terrain for cover, terrain that sometimes wasn't really as great as the Americans thought. What little armor they had was moved to the island and hidden away as a mobile reserve. Aircraft by the thousands for kamikaze missions were positioned in caves or well camouflaged, to be launched when the attack was just beginning. US Intelligence expected some 6500 kamikaze to be available; at the time of surrender, they were horrified to discover the actual number was closer to 13000. By August, 1945, there were close to 900000 troops on Kyushu as well.

Operation Olympic would almost certainly be won by the Allies. That's pretty much not in question. The question is, would the American public, tired of war and freshly victorious in Europe, be willing to pay the butcher's bill involved with just the first part of the invasion of Japan. The Japanese high command was betting on making the invasion forces bleed and the answer being "no."

Immediate sources:

US Army MacArthur Reports V1, Ch XIII: *Downfall: The Plan for the Invasion of Japan

DM Giangreco: Operation Downfall: The Devil was in the Details PDF warning.

DM Giangreco: Hell To Pay: Operation Downfall and the Invasion of Japan 1945 - 1947