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Luigi's name comes from a pun on the Japanese word ルイージ¸ or ruiji meaning "similar". Since all of his sprites in earlier games were just recolors of his brother's sprites, and his name was Italian like Mario's was, it seemed to fit him.
Comments (2)

Sorry to disagree, but similar in Japanese actually translates to something else: https://translate.google.com/?sl=en&tl=ja&text=Similar&op=translate
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https://en.wiktionary.org/wiki/似る#Japanese
https://en.wiktionary.org/wiki/類似#Japanese
Miyamoto's next sentence in this article describes Luigi as "a hero but of the Chaplinesque type." The fact that he's categorized as a "Chaplinesque type" is an important distinction, because Chaplinesque on its own is used as an adjective for having or trying to emulate the traits of Charlie Chaplin's film characters, but this style being denoted by Chaplin's last name means that his characters' qualities are unique enough that it's inherent that not everyone naturally acts like them. Luigi's timid and occasionally heroic qualities aren't an appearance he's putting on to resemble those characters, he was designed to genuinely behave like them. So in this case "ruiji" is being used correctly to refer to the fact of being similar as Luigi's name originates from a pun meaning that he is a similar type of hero.