The enlarge happens only at casting time.
Both spells explicitly state that "Any [enlarged, reduced] item that leaves an [enlarged, reduced] creature's possession (including a projectile or thrown weapon) instantly returns to its normal size." Since they don't mention any size change when entering such a creature's possession, it's safe to assume they intentionally didn't include it because they didn't intend it to happen.
Game balance explanation
Essentially you have covered the reasons why this is the way the spells ought to work for balance purposes. A lot of funky behavior is possible when items are enlargeable; however, enlarging a person is far less useful if you can't enlarge their weapons, clothing, and armor, as well. Presumably, instead of drawing the line at "worn or held", and having the tricky "backpack grows, contents don't" situation, they include everything carried and not just held.
Game physics explanation
For a "realistic" justification of this behavior, think of it as a magic field initially shrink-wrapping the creature and its possessions, enchanting it, and then dissipating. When an item exits the shrink-wrapped area, it returns to its mundane size and the shrink-wrap shrinks to its new shape. Picking up an ally, then, won't add the ally or his gear to the shrink-wrap.
Ok. So as your build already has a lot of set feats and such that you have to take we want to build upon that instead of trying anything new. So let’s take a look at feats and magic weapon enchants that effect critical hits or ways to free up any feats.
Not all of these options are possible for your exact build but I will add them for anyone in the future who wants to improve the build and has different stats than yourself.
It might be a little late as you have already taken it but the exotic weapon proficiency feat was not required unless you have a RP reason for the wakazashi. Kukri has the same crit range, they do deal less damage at a d4 though. The base weapon damage won't make up much of your damage in the long run though and it would allow you to dedicate your first feat to something more useful. You might ask your DM if he would allow you to use the downtime retraining rules located here.
Prerequisite Combat Expertise, INT 13
Depending on your team you might also consider this feat as it allows your character to give up his crit to deal normal damage but the next ally to hit with a physical attack auto crits. So your big barbarian friend can deal massive amounts of damage if he has a low crit range weapon but a high crit modifier.
Following the theme of using your high crit chance this feat gives you a +2 on a single attack roll, saving throw, skill check, or ability check of your choice before the end of your next turn if you crit or roll a 20 on a saving throw.
As you are after damage increase I will be focusing on magic weapon enchantments.
Magic Weapon page for reference.
Speed is a +3 enchant.
Speed is one of the more common enchants that players use. It grants an extra attack for each weapon it is on. So as your character dual wields that would be an additional 2 attacks at the character's highest BAB each round.
Again following the Crit theme the element burst enchants. Each is a +2 enchant
There are four of these types Flaming, Icy, Corrosive, and Shocking each of them auto adds 1d6 of their element to all of your attacks. And when you crit they deal an additional 1d10 damage. The cool thing about these enchants is they can stack! So you can have a Flaming Burst, Corrosive Burst weapon that deals normal damage +1d6 fire +1d6 acid on normal strikes and when you crit it becomes Normal crit damage +1d6 fire +1d6 acid +1d10 Fire +1d10 Acid.
No, the enemy would not be able to totally control an ally with Charm Person
That's the realm of Dominate Person.
First, we need to clear up some of your statements:
These are not your former allies, they're still your allies. You just happened to have gained a new close friend.
What would you do if two of your very close friends got into a fight to the death? You'd probably try to break it up, wouldn't you? You may or may not pick a side in the fight, but you're not likely to want to hurt either of your very good friends.
Heck yes it would, but the spell changes your behavior so that doesn't matter.
Now onto the relevant parts of the spell. From the PRD:
So, what happens if the person who cast the charm spell managed to win the Charisma check against you to make you attack your friends? You'd probably do it, but would likely not want to kill them, just make them stop fighting your buddy.