Is this for some kind of interactive wall or table? The ir led & sensor detect an object and the visible leds light up in response?
You may be able to reduce the complexity of the circuit by arranging your nodes into a matrix and using a method called multiplexing. This makes the software/sketch/code more complex, but it is usually worth it.
To multiplex, you would divide your 128 nodes into 8 columns and 16 rows, or vice versa. The circuit would scan the rows or columns one at a time, in 8 or 16 steps. Let's suppose you scan 16 columns in turn. In each column you have 8 ir leds, 8 ir sensors and 8 visible leds.
Using a Mega, you would need 16 digital outputs to drive the columns, probably via transistors because of the current required. Also 8 digital outputs for the visible leds and 8 analog inputs for the ir sensors. Maybe 8 outputs for the ir leds, although you could maybe have those on full-time.