So I just realised that everywhere on my world map is either storybased or created for their relevance to sidequests. This at first seemed like controlled construction (not wasting a player's time) but now I'm wondering whether that reduces realism; why was everyone happy to see the Murder She Wrote woman when her arrival essentially triggered murder?
So would more areas existing, simply for the purpose of developing a 'world' (like fallout), and not have the player bombarded by event after event be better?

That is the reason I'm making my game more sandboxish because some people me included don't always enjoy games that are linear/set on rails.

It will be tough to do right? yes but in my opinion it will be worth it.

I would say it depends on your story, having a more open world can actually take alot away from your game, or it can add to it, you just have to think about how strong your story is and where it could go.

Yeah, I'd say it depends on what elements exist in your game. (Elements like gameplay, etc.)
For example, a fast-paced battle system game would likely match better with a more linear story (like an action side-scroller or Fire Emblem game might), whereas a more traditional RPG could easily make or break a game by having a very linear story/gameplay.

The thing to remember is that you really don't want to simply create space, if the space has absolutely no purpose then it can be a turn-off. However, if there is a side-story (or some other hints at some mystery) that those areas help to convey, then I could see them being a huge addition to the value of the game.

"Better" depends on the story.

If your game is heavily story driven then creating open areas with no story reward will hinder your game by adding too much tedium and sidetracking.

However if the main story is heavily optional or non-existant, then creating an open world sandbox is almost a necessity.

Know what your game is and you should be able to figure out what to do.

And it depends on the type of game you're going for, as well. Most jrpg's follow some form of linear path, even though the game usually opens up about midway through. Even then, there's seldom an area that doesn't serve a purpose.

If you want more open areas, but still keep it similar in style to typical jrpg's, then create new areas simply for side quests or for further exploration and loot gathering. However, if the player is going out of their way to search these areas, they'll probably expect some type of reward (whether it's an optional boss, treasure, side story, or some other secret).

But if the open areas just go to something random (like an empty cave) that serves no purpose, sure it's realistic, but it may not be appealing. The exception may be in dungeons where you want the player to find their way out, or when the player is searching for something, but they are not exactly sure where to find it, so adding useless areas may help make the quest more challenging.

This is true, I'm going on the assumption that the main story is captivating and that any side-quests/stories would only boost the value of the overall story.
I know it's not going to be true of all cases, but sometimes it works well.

Consider Star Wars; we really don't care about all the insignificant lives of the average civilian in the Republic, but when you say something like "this community elder used to be a Jedi that even gave Yoda a run for his money" then you can create an entire story just on the past experiences of this random old guy. And it might not specifically do anything for the main story, but somehow you feel that you wanted to know it and that it helped bring out some random history of Yoda and you appreciate it for that reason.
If you can build that same element in your own story, then I think you've accomplished a major feat in storytelling. =]

Well the game is very much a generic 'ff' rpg, which is why even though there's room for exploration my main concern stems from the amount of story forced, crammed even, at certain points (well towns essentially, theres a little in dungeons but not much).

I'll consider everyone's comments, and it may be I'm just naively desiring the best of both of worlds

That is something that everyone wants to do, but if you try to go for the best of both worlds, you can end up failing miserably, but saying generic ff, that doesn't really give much of a way of decision as some Final Fantasy's' are simple linear, whereas others are sand-boxed....
It all depends on the market you are going for; as far as I personally am concerned, it seems that most RPG's have places made for a purpose, and i prefer it that way, even though i am a fan of open sand boxed, even they need some format or reason to travel through, even if it is as simple as some interesting NPC's that give you a memory of that place...

Yes, purpose and reason is key. =]

I wouldn't discourage you from trying to get the best of both worlds though, because you really don't know what works unless you try it.
Theory is great, but it is still theory.