How to Learn Japanese Vocabulary, Realistically

Often times language learning programs and learners themselves conflate 'practice' with 'learning'; the idea that one can effectively learn vocabulary by reading basic vocab list or flipping through some flashcards.

I've found that even textbooks rarely teach vocabulary, and teachers only sometimes take the time to really describe and explain a vocabulary item.

Thinking back on my experience in Japan, there is a natural process for learning a word that classes, textbooks, and flashcards rarely duplicate.

I've tried to break down the process to it's individual part and it goes something like this:
You hear someone say a word in a sentence that you don't understand. You ask them to repeat the sentence. You then repeat the unknown word back to them as a question. They isolate the word and repeat it back for you.
Then you ask them what it means. They try and describe it in their language. They give synonyms, descriptions, example sentences (you could say…). You still don't fully understand it, so they try saying the word in English, telling you what it means in your native language.
At that point, you have a pretty good grasp at what the word means, so you're able actually use the word in a sentence (making up a unique one of your own). And, at that point, you can have a conversation using that word as topic.

Here is a really simple example (hopefully you can follow the Japanese, otherwise a translation is provided below):

A: 私には猫がいます。
B: ねこ?
A: はい、猫。
B: 猫って何ですか。
A: 猫は動物です。猫は犬と反対のものです。たくさんの人がペットとして猫を飼っています。
A: 例えば「私は猫が好きです」と言うことができます。
A: 英語で猫は「cat」と言います。In English, 猫 means cat.
A: I have a cat. 私は猫を飼っています。
A: これは私の猫の写真です。
B: ああ、猫。わかります。
B: 私は黒猫を飼っています。名前は「Licorice」です。
B: あなたの猫の名前は何ですか。

A: I have a .
B: A ねこ?
A: Yes, a .
B: What is a ねこ?
A: A  is an animal. A  is the opposite of a dog. Many people keep  as pets.
A: For example, you can say "I like ".
A: The kanji for cat is "".
A: in English, a  is called "a cat". 英語で猫は「cat」と言います。
A: 私には猫がいます。I have a cat.
A: Here is a picture of my cat
B: Ah, a cat. I understand. 
B: I have a black cat. Its name is Licorice.
B: What is the name of your cat?

Through this conversation, you learn a new word from many different perspectives.
If you could somehow take this person-to-person process and apply it to individual vocabulary items in a self-study setting, you would have a significantly better understanding of the language and better retention rates, as the process activates a number of different ways of thinking.