The main reason is the rise of game development in the west. There is much, much more competition in gaming now, especially considering western games are tailored to western tastes.
Another problem is that the old guard is still on top. Because of the lack of PC game development in Japan, we haven't seen smaller developers rise up and push the top dogs. Look at how many western developers started out on the PC and are now big time. I think that's what Keiji Inafune was talking about with Kickstarter, how he'd like to see other options for Japanese developers than going to the same controlling Japanese publishers, who will just take your IP.
The one aspect of Japanese games I really have a problem with personally is the horrible attempts at storytelling that we often end up with. Reading some accounts of how executives will demand changes to the story throughout, I can understand why. They want to add this, take away that, change this to something that will be more popular, until what's left is a total, nonsensical mess.
Ultimately, I think there are just too many old businessmen in control.
