I don't know. They are all about this thing called "being social" for some reason...

The PS3 and 360 happened, people like too blame the 360 but the PS3 is as well too blame. PS3 was hard too develop for during its time and it off-putted a lot of developers to going to handhelds and mobile. And 360 for being a console not many Japanese wanted.

That can't be the reason, the decline started a generation before that.

Maybe or maybe not, it didn't help that's for sure. Also the PS2 sold 20+mil in Japan, the PS3 has done only 10+ mil, that is where the decline started. GC and Xbox didn't do well in Japan and that was because both barely had any games the Japanese wanted.

Interesting thread.

My reason would be:

1. The rise of the western developers in the home console development market
2. Rise of handheld/mobile gaming
3. Changes in lifestyle (time spent at home)

The culture of Japan is very much on-the-go. They don't like to be inside all the time like Americans, so they prefer mobile and handheld gaming.

Also, the 7th gen sort of put Japanese games on the back-burner (aside from the Wii and the PS3's later life) and I'm sure that turned Japanese gamers off quite a bit.

This is what came to mind for me in the past 5 minutes. In my opinion:

1. Westernization of video games, as a broad concept. What I mean by this is there are several possible factors that could be mentioned, but I should like to outline only one. This is none other than online gaming, which has become a huge market in the Western world. Japan has not produced many online games to counter or coincide with the Western rise of CoD/Battlefield/LOL and other online games for home platforms (exceptions to the rule include a few MMOs, fighting and racing games). 6th generation was the first (correct me if I'm wrong) to have online capabilities, although not implemented that heavily. 7th generation did implement its online capabilities to a much fuller extent. In either of these generations, Japan's developers did not really put out any heavy hitters in the online gaming boom. A possible relation? Meh, maybe.
2. Less time at home is a larger reason. With the pressure on recent graduates to find a job right away, and large amounts of time commuting to and from work on public transportation, mobile/handheld gaming found its way in. There just isn't that much time for many of them to spend at home and game on a home console.

My personal experience, having lived in Japan for nearly three years:

Previous generations were bigger because the number of children, teens and people in their 20s was much bigger. It's mostly just a demographics issue.

Unlike in Western countries, where adults seem to keep playing games, most Japanese adults seem to give up on it as soon as they find a job with a permanent contract. They simply have no time to play games anymore, because many people work insane hours and are 100% dedicated to their jobs, and the little time they get they often need to spend with their families. Hence handheld gaming grew exponentially as home consoles declined, those teens became adults and now played mostly on the train. Now that everyone has a smartphone, that is replacing handheld gaming too, because it's more convenient for most people. Japanese people are obsessed with "convenience". Seriously, you'll hear that word here all the time.

Other smaller factors: many adults seem content with replaying old games from the NES-PS2 era, and don't much care for better graphics. Retro gaming is really big here. Another thing I often get is people saying modern games are too "difficult", which is funny because most people would say otherwise, so I think they mean "complex".

As for your arguments on the Japanese industry, it might be true that Japanese output has declined, but that's also to do with there not being too big a market and games becoming expensive to make. However, I'd like to point out that many teens and kids are way more interested Western games than adults, Actually, most people I know with PS4s are fairly into Western games like GTA, CoD, Battlefield or Minecraft. Those are definitely the top 4, but there is more buzz for Western games in general among the core gamers left. Those people also seem more willing to buy PS4s right now.

sadly 8th gen is gonna be smaller than 3rd gen, and handhelds are down from last gen too. Gaming is moving from being in the arcades, to at home, to on the go, to being on your phone. It's still in it's early stages, but it will happen.

Japanese developers weren't making games that appeal to gamers on consoles. Ex: Square Enix

this is changing now with PS4