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3DS dominates Japan because Nintendo dominates Japan.

The smartphones, tablets etc. excuse, that people so like to use nowadays, though have it's place in the market and a huge one, is overused. Japan is as much if not more geeky about portable tech as the West, and yet 3DS is underperforming over there. Though I doubt this scale of domination possible for Nintendo outside it's homeland simply because of severe competiton, but it could perform better. The problem is not 3DS or handhelds in general, but Nintendo brand by itself.