The switch itself works because the little light turns on and it turns itself off after the right amount of time, the rear window just doesn't defrost.

The rear dome light also doesn't turn on when I open the hatch but it will turn on if turn it on manually by pressing it. I'm wondering if there is a break in the wire somewhere?

Anybody else ever experience this problem??

Pic of my last XJ for views:

 

do you have a multimeter? if you do set it to 12v and turn the switch on touch the parts of the grid, and see if you get a break in power... there should be a flexible wire going from the door to the window (and another in the jam of the body and the back hatch... you'll want to start tracing the wires around there too...

 

My 97 had a problem with the rear dome which was an isolated problem from my rear wiper switch. The dome was just buggered and I had to get creative and make my own switch because the internals were smashed. Turned out the wiper switch was also smashed on the inside; good thing I watched Macgyver as a kid, had to rig that up myself too. Those switches are made by autistic asians who are the only people who could possibly concieve such a confusing relay of parts. You can repair it, but it's not simple and it's $40 from the dealer if you replace it!
Good luck, cheers!