Not all people in Taiwan spoke Japanese during the colonial period, but a very significant number did. During the colonization, Taiwanese were treated as second class citizens by the Japanese, and in fact there was quite a lot of racism. The historical novel, Orphan of Asia by Wu Chuo-liu illustrates this really well. The title comes from the fact that Taiwanese people often felt identity-less. The novel itself was actually originally written in Japanese, and the novel is in fact autobiographical. Part of the identity crisis among Taiwanese was the Japanese language. Many knew the language, but when they interacted with Japanese they were still not considered equal. The main character of the novel has a love for a Japanese woman living in Taiwan, but she rejects him when he tries to make their friendship/relationship “official” because he was of a lower race in the view of the Japanese. Later, he actually moves to Japan for a period and really understands what the Japanese feel about Taiwanese people.

There are in fact a very very small minority of Taiwanese people nowadays who can speak Japanese. The language never really displaced Hokkien or Hakka though. The Guomindang enforced Mandarin usage during their colonial period, but after the end of the White Terror, the government began to take steps to preserve the usage of Hokkien and Hakka (around 80% of Taiwanese speak Hokkien and/or Hakka today). The “native” languages you speak of also have a special status, but few people speak them now due to a couple hundred years of ethnic Chinese immigration to Taiwan.

To add to what’s already been mentioned above, the Japanese administration’s policy towards Classical Chinese can be described as “conflicted” at best.

During the initial years of colonization Classical Chinese was indeed a rhetorical tool used by the Goto Shinpei administration; common heritage is, after all, a useful way to build a collaborator class. The context in which Classical Chinese was mentioned, however, is telling.

Goto’s attempts to woo the Taiwanese Gentry in 1900 “quoted liberally from the Chinese Classics” while discussing the value of recently imported Western scientific knowledge to Japan; just as Japan had borrowed from Chinese culture, so too could the West be of use to Taiwanese. In other words, Classical Chinese education was on a definite back foot compared to the larger goal of reaching the technological and educational standards of the West, and by extension parity with Japan.

The rapid pace at which Japanese curricular foci supplanted Classical Chinese should speak for itself as well: the 1919 proposal of Governor Akashi, which included Classical Chinese for secondary students, rapidly watered down the place of Classical Chinese to an elective where it was offered at all by 1922. (It was abolished in common schools by 1937.)

This is in line with a wider displacement of Classical Chinese educators as well as a general shift of Japanese educational policy from integrated education to active assimilation, both of which are no doubt interrelated. But the short story is that Classical Chinese had long been discouraged as a means of achieving cultural sophistication in favour of a more conventional, Japanizing approach.

Source: Japanese Colonial Education in Taiwan, E. Patricia Tsurumi