In Generation 8, Microsoft will focus it's attention on Europe. It won't attempt to win Japan as it tried this generation. The reason is simple, Europe provides a market similar in size to the US. Dominate Europe, dominate the US, and Japan will eventually follow.
The people who say the Japanese will only purchase Japanese products are just cynical. The Japanese are like sheep. If enough sheep follow one shepherd, they'll get in line. When the Wii was hot world-wide, so too was it in Japan. When the PS3 grew stronger in Europe, so too did it in Japan. Even the iPhone has enjoyed success in Japan.
Microsoft can't make Japan happen for them, only the Japanese people can. So, for 60m gamers Japan just isn't worth it. Money is better spent on services and infrastructure in Europe to provide features and services Europeans would value. Not to mention, European taste for games is similar, though not the same, as North America.
Localizing games for Europe has benefits for other regions. A game localized for Mexico can with relative ease be localized for Spain with some specific localization. Likewise for Brazil and Portugal, Quebec and France, or the US/Canada, UK, Ireland, Australia, and New Zealand.
Localization for Japan doesn't make localization for Korea, or China, or Vietnam any easier because the languages are significantly different.
Finally, Japanese development studios have been a sinking ship. The performance of NA developers as compared to Japanese developers (First Party aside) shows NA game studios outperforming their Japanese counterparts by a significant margin. I won't go so far as to say that Japan isn't relevant anymore, but it is on the verge of becoming irrelevant.