The picture you see is the high res jacket texture from Shenmue 1, directly ripped from the game. Not sure which version is exactly used where, but supposedly inside the hazuki residence and in the passport talking heads higher resolution textures were used from what i remember. I didn't check in-game though, but if ya lookup pictures on google you can also witness the "flag" version in many screenshots. Maybe it even varies during gameplay depending on which model was used.
My guess is that it is an overlooked thing, noone noticed - not the developers, not quality control or magazines and not even the players. Well until you came around with it i guess.
In SEGA all-stars racing they used the "H S" patch interestingly. Why the patch was changed so often during development remains a mystery.