After fixing this, I re-registered my Apple Pay card (again, I had to call the bank to activate.) 2 days later my phone got back in that state where I can't see or do updates, can't download previously purchased apps, or buy anything in the App store. I turned off Passcode Lock, rebooted, and the problem was fixed again. Unfortunately this deactivates the Apple Pay card.
So I did some troubleshooting and figured out the following:
1) This has nothing to do with ApplePay or TouchID. I can reproduce this without registering an Apple Pay card, and without turning TouchID on for anything.
2) This happens after rebooting the phone. That is, app downloads and updates work, then you reboot the phone, you enter this bad state.
3) Turning of Passcode lock on the phone always resolves the problem.
So even without activating an Apple Pay card, registering fingerprints, or turning on TouchID for any service, I can create the problem by simply enabling passcode lock and rebooting the phone.
I tried to reproduce this on my factory reset iPhone 4S with no success. So it's either only a problem with iPhone 6, or there is another variable that comes into play. On the iPhone 4S I even logged the phone into my iCloud account including the keychain (then rebooted) and that didn't make a difference.
In the past I have connected my phone to iExplorer and manually deleted files out of the media partition to resolve iTunes out of sync issues (files in the "other" state,) so there is a slim chance I got rid of something (like a key file) that doesn't come back unless I factory reset. I don't think that's the case.
In the mean time, turning off passcode lock and rebooting always fixes it. I don't know how I'll ever successfully use Apple Pay like this because something inevitably causes me to have to reboot (or the phone crashes) reboots within 2-4 weeks. That would require me to have to constantly re-register my Apple Pay card.
I'm at the point where I may consider doing a full DFU restore and set up as new phone. That's obviously very disruptive and takes a lot of time to get all of my apps re-registered and logged into their various services so I'm reluctant. But it could fix the problem (or it may not.)
I am a registered developer and can file a bug with Apple. But I'm reluctant to do so until after I've tried the full restore in case my phone is in a unique state. I want a 100% reproducible case.
Also before the restore I may try iOS 8.2 beta first. I don't expect the problem to be fixed in 8.2, but if it is I'll report back so everyone know.