I think they are moving more towards a handheld only market.

I'm not japonese so i can only speculate but it would seem they really only like the handhelds now a days. i base that speculation entirely off of the consol/software sales. DS and PSP are selling like mad and all 3 home consol seem to suck it up.

 Launches aligned, hasn't the Wii been outselling the PS2 so far?

 your point? the Wii is cheaper then the PS2 was when it was launched in Japan. The Wii is covering for all major console purchases in japan while the PSP and DS is still eating up most of the gaming market. mentioning the PS2 at this point is pointless. 

Somehow Japan doens't matter anymore in the scope of sales since Mario didn't light up 500,000 first day... Okay, great logic... But I think that Japan really matters, maybe they are finally tired of playing Nintendo's game of no games on the system except mario. Maybe this'll send a message to Nintendo to send out some new IPs, not the same IPs rehashed over each console. and to piggyback on stof, the launches aligned, the wii has outsold the PS2, I think people just can't believe that Mario didn't move 500k first day... Gaming is still huge in Japan and it still matters.

1) Handhelds in Japan. Wow, big.

2) Developers realize that it's no longer "make for Japan, bleed to US, give scraps to everyone else." Examples include Zelda:Twilight Princess's realistic art style aimed at North America. Capcom and Konami actively seeking American and European developers.

3) The Japanese userbase is smaller.

4) Recovery from the Japanese gaming slump that occurred (still occurring?) a few years ago.

Japan is no longer the #1 indicator of everything game related. It's interesting to see how the industry evolved.

I can't believe I'm saying this but I have to agree with ssj12. The Wii came out strong in Japan but now it seems to be losing steam. I know at least 3 people are going to come in and say I'm wrong. So I'm waiting! ;)

With Japan selling just as much as all of Europe, I would say that it isn't irrelevant, and I don't see it becoming irrelevant anytime soon. Irrelevant is a strong word.  Do I think that too many Japanese publishers put huge emphasis on Japan primarily as a deciding factor for title choices and releases? Yes, but that's another argument.  You have to consider though in this, that most of these companies are Japanese companies and have to answer to Japanese stockholders who also care about Japanese trends. 

The only people that are surprised in the 1st day sales of SMG are the ones that thought it would sell loads out of the gate. There were people saying it would hit 2-3million before 08'.

It's not just Mario. Nearly every classic genre of gaming has been declining in Japan over the past few years while casual gaming has taken off.

Some of us have been arguing this for over a year so it's not as if we came to this conclusion after reading about Mario selling 130k on day one. It just reinforces what some of us have been saying for quite some time.