Shenmue Online development started in February 2003, and the first official news of "cancellation" was Yu Suzuki saying this on September 17th, 2008: "Due to a situation, the project is in a “pending” state. But personally, I’m hoping to be reunited with Shenmue Online. I haven’t given up.”
The last we had seen from the game was from China Joy 2006, I believe. Three years isn't really that quickly.
And speaking of magic, Shenmue's reveal to the public involved magic. Remember the Project Berkley video packed with VF3TB? Giant mirrors moving and settling, Shenhua discarding two guys hanging onto her with a magic explosion, the glowing blue/green statue in the temple? People whine about Shenmue Online ruining the franchise with the magic stuff, but everyone should've known.