Just did a quick test, and it does indeed seem that if the character name exists, it just gets stuck in a loop. Essentially, that's a Name already taken error that's failing to show.
Exit the game by going to home from the system menu, then come back in. It may show the name you tried with "Name already taken" under it, but if you try a new name (and that name doesn't exist!) you'll advance to the appearance selection screen and be able to continue.
Added to the bugfix list!