I'd say Japan matters less in terms of sheer hardware these days, because the technology is comes from all over the world. All the consoles are built in China, rely on Korean DDR, EU motion sensors, US microprocessors, Taiwanese chipsets, etc.
But Japan remains a powerhouse in game software and design. One of the reasons is that Japan has a thoroughly multinational gaming culture, with deep roots in Japanese anime (animation), US science fiction and fantasy culture, Japanese manga (comics), and the Hong Kong films.
Weird as it sounds, as late as ten years ago, Japanese videogame designers were not well regarded by mainstream Japan - they were the crazy outlaws of the media culture. So videogames were this zone of remarkable innovation, a place where you could break the rules. I think there are places around the world which might follow the Japanese model of concentrated local innovation -- Seoul, Korea, and St. Petersburg, Russia are taking off as centers of game production.
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