It's a bit like the dungeon finder in WoW, except that it's not an altered version of the instance, it's the same as if you took a preformed group with you. In fact, the larger instances don't even allow preformed groups at this time (Frontlines and either version of Crystal Tower). The server you are on still matters for the duty finder though, as it grabs people from the same data center. I forget where you can find information on which servers belong to which data centers, but it's not especially important. All Japanese servers are in Japanese data centers, NA servers are in NA data centers, and I believe the EU designated servers are in a common datacenter.

As such, on a JP server you won't encounter people on EU or NA servers and the lag will be more or less the same as if you weren't in an instance. I think if you poke around a bit you can find what JP servers have the highest EN speaking population. Character creation restrictions are dynamic based on the total number of characters currently logged in, so you can typically create a character even on heavily populated servers by doing so during off prime hours.