To be fair, games like Bethesda's TES series do have NPCs that all have full work, sleep, and leisure schedules. It was one of the most touted features beginning with Oblivion, and continuing in Skyrim.
The difference - and in my opinion advantage - to Shenmue's implementation of this (apart from being the first game to really innovate it) is the smaller, more closed community allows those schedules and behaviors to 1) feel more important, and 2) actually get noticed by the player.
Sometimes in modern sandbox games, there's almost TOO much freedom to really stop and appreciate the more subtle stuff that's going on. But with Shenmue, everything from the camera's closeness to Ryo, to the methodical pace, to the smaller scale of the world all forces those things into the player's attention front and center. And as a result, they feel so much more immersive and REAL to me.
In sandboxes, the journey and the experience is about massive visual vistas and freedom to roam and create your own personal story. In Shenmue, the the journey is Ryo's, and the experience is about intimate, granular minutia and everyday life details. It's almost more like a life sim than an open world game.
That was by far what I loved most about Shenmue.
Sidenote: What was the first game to feature dynamic shadows that change with time of day? Because Shenmue 2 did a fantastic job with that and I remember thinking at the time that it was amazing. Did it innovate that too? Or at least beat others to it?
You've basically summed it up perfectly :) An 'open' world that still feels intimate and small. Most open-world/sandbox games just feel a bit soulless and anonymous, to be honest. As said thoigh it is a pity that some of the finer details were lost in S2, to the point that in my most recent playthrough I have been surprised when some shops have actually closed at night-time. I guess some cutting back was necessary because the world is so much bigger than S1's, but it's still a shame. Hopefully we'll see a bit of this return in S3, seeing as it will be set in villages, hopefully allowing for more attention to be given to the little details :)