I tried to use a hex editor (Thank you for the assistance), but, it displays the dialogue in the same vein as opening it with wordpad : broken words mixed with random characters. I do not find how it could possibly be modified directly in this manner, especially since the dialogue is not displayed (formatted/structured) how it is shown in game.
The characters aren't "random" – each of the characters probably has its own specific function, like a line break, or introducing a delay, or indicating the end of a section. The big advantage to using a hex editor is that you can see all of the bytes in the file, including those that don't have normal ASCII representations (and would be completely invisible in WordPad). Unfortunately, there's no way to find out what each of the "random characters" does except for trial and error.
Often, ROMs for other consoles use a "pointer table" for their text: a list of offsets within the ROM where each piece of dialog starts. In cases like that, making dialog sections shorter or longer is (usually) just a matter of editing the pointer table. But for a big disc-based game like Skies of Arcadia, there are probably many different ways of laying out the dialog.