The only "not so bad point" I see for the PS3 in Japan is that it remains the only HD console Japanese care about. And I'm not talking about Blu-ray here; I mean the PS3 is the high-tech console in Japan. Of course, the Japanese market has gone casual and, as someone said somewhere in this site, Sony developers forgot about creating content to rival the Wii there. But the drought is also one of third-party titles. Third parties are so dedicated to portables, Wii and even PS2 I doubt they are really capable of developing "properly" for the PS3 and its intricate CELL. 

But also there's one tiny light spot for PS3 in Japan: the Sony brand remains STRONG. The PS2 and PSP still entice many Sony faithful. Can those become future PS3 users? Sure, but mass adoption won't happen for a long time or all at once. It will take years and of course the migration will happen only if the PS3 gets the games to make it worthwhile. Since demand is so low for PS3 in Japan and AAA Japanese software is scarce or nonexistent, it is dubious Sony is producing large quantities of the console. The PS3 is right now, in a limbo. It doesn't belong in Japan….yet.  

It's an awkward position so it's demanding an unorthodox strategy. Right now it's clear Sony is focusing on PSP and PS2 in Japan. They are fighting fire with fire, that's the only way they can keep themselves in this market at the moment. That's the only way they'll pave the way for PS3 too. People talk about Final Fantasy and MGS4, but I realized it's not a matter of a couple of games. I believe they will need to refocus the whole PS3 strategy. Fortunately they are working on that along with a solid lineup of titles that will make the PS3 feel, look and play as a fresh, Japanese console. They will attack PSP interactivity with PS3 more, they have to make online community a strong asset (remember XBL is nonexistent there). And a Slim version of PS3 must release at the end of this year, as the latest. If they can do all this, it'll be like a new launch for PS3 in late 2008. To put it in an analogy: right now the PS3 is the "DVD" in a "VHS-dominated market". Fortunately they also have their own "VHS" to fight in this war, until they can put their PS3 act together (ready the market, rally the developers) and make a strong offer to gamers worth the transition to the HD platform.

Is there any evidence whatsoever that sony is going to put out a slim version of their console within 2008?

The console is struggling in the casual dominated Japan but this should change when the games people want are released! I mean FFXIII will do wonders for the PS3 in Japan, along with a price-cut and a slim version (if planned anyway) would be enough to keep the PS3 at least in a decent 2nd!

I expect the wii vs ps3 battle to be eerily similar to the ds vs psp battle i.e wii wins, but the ps3 consistently outsells it for its last couple of years

Focusing on PSP yes , but PS2 .... well I wouldent say that by looking at sales .

very nice analysis

@hunter_alien: what about PS2 sales? Poor for an 8-year-old system which every unit sold is pure revenue since years ago? Take a look at current PS2 software sales and upcoming new software , and think again.

PS2 is kind of in the position SNES was in during 1997

Hardware sales obviously in decline...no one is too sure where the majority of the userbase will go

So third parties keep mining the remaining active users for money during the transition until it becomes clear where people are going.

Compare PS3 and PSP and PS2 weekly sales for a moment since PSP launched:

2008 (15 weeks so far)

PSP ~ 87.5k

PS3 ~ 25k (not a consistent 25k though)

PS2 ~ 12.5k 

2007

PSP ~ 60k

PS3 ~ 23.5k (again not consistent, under 10k lots of weeks)

PS2 ~  15.5k

2006

PSP ~ 36k

PS2 ~ 29.5k

PS3  ~ 59k (only out 8 weeks this year though)

2005

PSP ~ 43.5k

PS2 ~ 42k

2004

PSP ~ 159k (in three weeks)

PS2 ~ 63k 

PSP is clearly going to get more support - sales have never dipped under 35k per week in any year. If you can stay at 40k/week for an extended period in Japan you earn support.  PS3 is no where near that level, but PSP has been there consistently in Japan, so in many ways it is looking like PS2 owners are choosing it over PS3.

 Pure profit , true , but its far from what it was , and we are talking about the present sales .... why do I even bother , TheSource did a much better job at explaining it :)