You're correct in that the iron sand was probably the worst type of iron source to be used in manufacturing weapons - the sand was found in deposits along riverbeds, and compared to European iron was much harder to properly refine (in terms of getting the proportions correct).

It's also interesting to note that it was this general inferior quality of steel that lead to the intricate techniques of swordsmithing developed by Japan.

The reason why Japanese didn't buy metals off the Europeans is that, by the time there was contact with the West, they were exposed to the power of new weapons - the matchlock, the cannon - in essence, advances with gunpowder. Following this, West and East established a trade route known by the Japanese as the Nanban trade.

The Portuguese matchlocks were light, easy to operate, and required little training to use. Coinciding with the Sengoku Period (mid 1400s to mid 1500s) where Japan's feudal lords were at war with each other, matchlocks gave a simple foot soldier the ability to kill those who were trained.

While bows at the time were generally superior to firearms (as firearms took long to reload and had shorter effective ranges), the deciding factor was the time it took to train a bowman in comparison to a line infantryman, and also much cheaper.

So in other words - they didn't trade metals with the West because, by the time they had contact, they were beginning to adopt firearms. They traded matchlocks early on but then smiths began to adapt to the new techniques of creating guns.

Following the Sengoku period, the victorious Tokugawa shogunate issued the Sakoku policy, or isolationist policy that cut off all ties with the West - this lasted from 1630 to 1853, and meant that, again, there was no trade of metals or weapons.

Sources:

Giving up the Gun - Noel, P.

Technology and the culture of progress in Meiji Japan - Wittner, D.