@Both: I honestly think that "gaming downtime" is as important as how much you thrust your players into the action as well. A lot of people bitched about FF13's lack of towns, and I think that was a big reason for it. The Last of Us was especially great at making "safe zones" where you would chat with Elie are what really make a game memorable and feel more like "simple characters". I also think the Tales series thrives really well on this because of their skits --- they tend to goof around half of them, and talk plot points that otherwise flesh out or wouldn't have made it into the game otherwise.
I agree, characterization is really important to me in RPGs and in addition to the story, I find it really develops them to have some downtime random scenes together that don't advance the story but do show more of the characters together in less serious situations. I love the skits and ATbs mentioned. I love just having some lighter random scenes. FF13 was just too serious all the time and never had any real downtime to sit back, relax, explore a town, chat with people and perhaps chat with your party members too. Star Ocean used to have your party break up and explore the town separately and you could chat to people outside of the party as well as some optional scenes.
I can't really think of any games that did naughty bits very well except perhaps for any that faded to black and let the players' imagination fill in what happened. Bioware sex bits are more laughable than sexy due to how clunky and awkward they look. The fade to black thing... You think Tidus and Yuna did more than splash around in the water near Macalania Woods? 💋
I'd love read your take in FF8 Dice!