Historically Japanese used to call foreigners 外人 (gaijin) which means foreign person.( or if you wanted to be more specific it technically means "outside person" 外 means "outside" and 人 means "person" though 外人 mostly gets translated as "foreigner" by google translate)
And then over time 外人 was considered to be "rude" and "politically incorrect" because 外人 refers to anyone that was not of Japanese ethnicity even if they had Japanese citizenship, so they started saying 外国人 (Gaikoku jin) which means "foreign country person" (or outside country person though again google translate translates it as "foreigner") which is the term used by the Japanese government and media. There's still people who say 外人 but the mainstream term is now 外国人.
And now there are those that even take it one step further to start saying 海外の人 which means overseas person.
So who exactly was responsible for the political correctness being pushed over there?
This is similar to the bastardization of language in the West. its like how "illegal alien" started becoming "illegal immigrant" and then it became "undocumented immigrant" or even why the West doesn't even describe foreigners in their countries as foreigners anymore, or how "transvestite" became "transgender". Political correctness became so bad that even conservatives stopped using "illegal alien" and started using "illegal immigrant" similar to how even in Japan conservatives started saying 外国人 instead of 外人 even though they are clearly still using the term anytime they see anyone that doesn't look of Japanese ethnicity.
Transvestites aren't transgender, and thinking they are shows that you've fallen for their language games even while decrying it.
Transvestites were crossdressers, they were full on and open about having AGP (even if that word wasn't wildly known) and their entire purpose was sexual thrills from being dressed as a woman. Most of the time they didn't even bother to shave their beards or put on a "girly" voice because it wasn't part of the thrill. They are much closer to the drag queens of today than they are the trannies.
As such, the transgender (which was bastardized from "transexual" if you wanted a better example) is more mental about it. They want to actually become a woman in some form, even the form they take is a mockery that appears just as bad as the transvestites. But its much more mental instead of purely sexual, which is why they are so much more insane than the transvestites of years past, who often could function normally in their day to day before going into their kink. Not that the trannies aren't heavily sexual about it, but they are much more of a full package transition instead of only certain times.
The blending of the two, as well as others like traps, is how they blurred the lines between all these various groups who didn't and don't have the same goals or beliefs but now unify under the "LGBT" banner. It also made it seem like trannies had "historical presence" to give them more legitimacy, rather than being a fairly recent cause.
Also the difference between all of them would have shown that there is more to being a tranny than just putting on a dress and saying you are, which is verboten. So they erased it and made them all the same.