A few reasons.
Firstly - The rise of the Portable market in Japan.
DS and PSP absolutely dominated in Japan. They were mega-popular platforms, cheap to develop for and the Japanese gamers flocked to them. Software sold amazingly well.
The DS has 14 JRPGs that sold over a Million in Japan alone. 26 of them sold over 500k. 86 games over 100k. The PSP has few 1M and 500k games, but 61 that sold over 100k in Japan.
Secondly - The PlayStation 2 domination, followed by...
The PS3 bombing. The PS3 was expected to destroy everything. It didnt. Sales tanked quickly after release and the console itself was horrible to develop for. Devs got burned early on and moved the focus elsewhere, which takes us to...
Thirdly - The Xbox 360
Instead of supporting the PS3, JP devs decided to support the 360. The console isnt popular in Japan but the huge American userbase made JP devs drool. They wanted HD and they wanted America. The 360 got everything. Star Ocean. Tales. New IPs with Infinite Undiscovery, The Last Remnant, Lost Odyssey from Mistwalker, Eternal Sonata, Blue Dragon...
Games that should have been on the popular consoles in JAPAN, were completely wasted.
One more reason? The fall of Square Enix. This one explains itself.
