Sempai 先輩 means senior, superior or elder, and Kohai 後輩 is junior. The Sempai-Kohai system is the most profound difference in culture I have encountered in Japan. Built into the Japanese language are different levels of politeness that affect not only word choice, but conjugation and grammar.
In English, we generally speak differently around different groups of people. I can remember in middle school when I first started noticing that I had a 'family mode' and a 'friend mode'. As I grew older I noticed the line blur when talking with my siblings, but I still speak a certain way around the adults in my family that is different than how I speak to my friends. This pales in comparison to the levels of Japanese speech.
First of all, Japanese has multiple levels of polite speech. Many young people can't even speak the higher levels well. Foreigners around the college level becoming proficient in Japanese are often better at keigo (polite speech) than the Japanese of the same age. The rules seem simple enough: When speaking to someone older than you, you speak politely. When the other person is younger (and not a stranger), you speak casually. But this carries over outside of work into everyday situations - including bars or parties. I've seen men speaking politely to other men that look the same age, but are actually one or two years apart. The older man responds in casual Japanese. To a foreigner, this might seem like a somewhat cold or distant, even odd conversation, but it is quite normal in Japanese. It isn't always like this, and people make mistakes, but in general it is easy to tell who is older in a conversation by listening to how people speak.
This can create weird issues with people who don't know each others age. Or as one of my friends brought up, it can be awkward with people in the same year in school but of different ages (something common in college). Does one use keigo or not? It isn't always easy to tell.
In English, we generally speak at the same level as the counterpart in the conversation (except perhaps in extreme boss-employee relationships). If Bob is talking to Jim politely, not using slang or anything like that, Jim responds the same way. If they are friends or are familiar they might both speak casually. But if one of them spoke politely and the other was casual, almost even rude, it would not be right for a variety of reasons. Keigo is hard for me to get used to, and I usually end up speaking casually to my elders because by habit, I speak the same as the other person. Luckily no one thinks anything of it because I am a foreigner.
Perhaps the most impressive benefit of the sempai-kohai system is the affect it has on those in school. I've never seen such apparent respect and admiration for the upperclassmen as I did when I was teaching in middle school. A middle school first grader (7th grader), who was particularly naughty in class and an all around brat, was the uncomplaining servant and follower of his 3rd year baseball club sempai. I saw him get things for him, speak politely, and obey various orders. Equally amazing was the lack of abuse of the system by the 3rd years. They didn't really treat the younger kids poorly, but they did demand their respect and service. I haven't spent a whole lot of time at middle school and none in high school, but if what I observed is common, it may just make the system all worth it.