I used CDMage for that.
This is definitely the program you want to use for Playstation games. HERE
. Some of their game files are written in a mode that Windows doesn't support so you'll get an error if you try to drag the file off in explorer (specifically, files containing sound). The reason for 'extracting' the files from the CD image is that CDs contain 'sector header' data at regular intervals throughout the disk image. It's just for the CD-drive's reference and not part of the actual game data.
When you 'extract' a file from a CD image, you're dealing with the data as the game sees it. CDMage will extract files from the game image (removing the sector data) and more importantly, reinsert the edited file. Just right-click on a file in the right-side window and select 'extract files' or 'import file'.
Compression is something completely different. Extracting a file from a BIN/CUE image won't decompress it. If the game happens to use compression (many do not), it's handled internally by the game's exe.
I have a couple tools I developed for my own use in translating PS1 games, but I was thinking of releasing them since they might help others. I'd be happy to have a tester if you get to that point. One is a simple address converter to help locate data between the EXE, RAM, hex editor etc. The other dumps text and pointers to an ASM file for easy translation, but it only supports games that use non-compressed Shift-JIS text.
As far as Hex editors, MadEdit is the best one I know of for Japanese text, HxD for data.